Question #116
Reading: Reading 20 Discounted Dividend Valuation
PDF File: Reading 20 Discounted Dividend Valuation.pdf
Page: 46
Status: Unattempted
Question
An analyst has forecast that Hapex Company, which currently pays a dividend of $6.00, will grow at a rate of 8%, declining to 5% over the next two years, and remain at that rate thereafter. If the required return is 10%, based on an H-model what is the current value of Hapex shares?
Answer Choices:
A. $126.24
B. $129.60
Explanation
The current value of Hapex shares is $129.60:
V0 = [$6(1 + 0.05) + $6(2/2)(0.08 – 0.05)] / (0.10 – 0.05) = $129.60