The firm ABC currently pays no dividends to shareholders. Its stock is$,$

however, expected to pay the dividend of $80$ per share a year from today. Thereafter,

the dividend is expected to grow at an annual rate of $10\%$ for the next four years and

from the fifth year from today, it grows at a constant rate of $3\%$ per year thereafter.

Assuming the appropriate discount rate is $12\%,$ answer the following sub$-$questions.

$(2$a$)$ Calculate the present value of dividends paid from the next year to the fifth year

from today.

$(2$b$)$ Calculate the present value of dividends paid from the sixth year from today and

thereafter. Then estimate the intrinsic value of the ABC stock today. If the market

price of the stock is equal to the intrinsic value, what is the expected dividend yield

today?

$(2$c$)$ What do you expect the stock price to be in one year from now? Confirm the

expected rate of return, which is the sum of dividends yield and capital gains yield, is

equal to the discount rate.

Answer rating: 100% (QA)

2a To calculate the present value of dividends paid from the next year to the fifth year from today we need to find the present value of each dividend ... View the full answer