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Deffense [45]
3 years ago
9

Yang Corp. is growing quickly. Dividends are expected to grow at a rate of 25 percent for the next three years, with the growth

rate falling off to a constant 6 percent thereafter. If the required return is 18 percent and the company just paid a $2.50 dividend, what is the current share price
Business
1 answer:
madam [21]3 years ago
4 0

Answer:

$60.45

Explanation:

Recall that

Po = D1/r - g

Where

Po = current price of stock

D1 = net dividend expected

r = required return

g = constant growth rate

From the question, we are going to pay at super normal growth rate for 3 years followed by constant dividend policy. The value after three years can be calculated by using constant dividend growth formula and after that, present value will be calculated. Thus, current value of stock will be

= D1/(1 + r) + D2(1 + r)^2 + D3/(1 + r)^3 + D4/(r - g)(1 + r)^3

= 2.5 × 1.25/(1 + 13) + 2.5 × 1.25^2/(1 + 13)^2 + 2.5 × 1.25^3(1 + 13)^3 + 2.5 × 1.25 × 1.06/(13 - 6)(1 + 13)^3

= 2.77 + 3.06 + 3.38 + 51.24 = 60.45

Therefore, present value of stock is $60.45

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Using a trial and error method, replace x with 1.45 million and work out the answer.  This option generates a profit of $100 million like 2 million accessories.

Question Completion:

The price that a company charged for a computer accessory is given by the equation 100-10x^2 where x is the number of accessories that are produced, in millions. It costs the company $10 to make each accessory. The company currently produces 2 million accessories and makes a profit of 100 million dollars. What other number of accessories produced yields approximately the same profit?

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Learn more about using the profit function to determine the production or sales quantity here: brainly.com/question/1456472 and brainly.com/question/25395113

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