Question #78

Reading: Reading 20 Discounted Dividend Valuation

PDF File: Reading 20 Discounted Dividend Valuation.pdf

Page: 30

Status: Unattempted

Part of Context Group: Q78-80 First in Group
Shared Context
- Assuming a beta of 1.12, if UC is expected to have a growth rate of 10% for the first 3 years and 5% thereafter, what is the value of UC stock? A) $53.81. B) $46.89. C) $50.87.
Question
Assuming a beta of 1.12, if UC's growth rate is 10% initially and is expected to decline steadily to a stable rate of 5% over the next three years, what is the price of UC stock?
Answer Choices:
A. $47.82
B. $46.61
C. $47.67
Explanation
Given: D0 = 2.00; gL = 0.05; gS = 0.10; H = (3 / 2) = 1.50; and r = 0.0972 V0 = {[D0(1 + gL)] + [D0 × H × (gS − gL)]} / (r − gL) V0 = [2(1.05) + 2(1.50)(0.10 − 0.05)] / (0.0972 − 0.05) = 2.25 / 0.0472 = $47.67
Actions
Practice Flashcards