Supernormal Growth [LO1] Eva Corp. is experiencing rapid growth. Divid

QUESTION

Supernormal Growth [LO1] Eva Corp. is experiencing rapid growth. Dividends are expected to grow at 25 percent per year during the next three years, 15 percent over the following year, and then 8 percent per year indefinitely. The required return on this stock is 13 percent, and the stock currently s
Here is how I set it up. D(t) is just the dividend at time t. CF(1) = D(0)*(1 0.25) CF(2) = D(0)*(1 0.25)^2 CF(3) = D(0)*(1 0.25)^3 CF(4) = D(0)*((1 0.15)*(1 0.25)^3) Terminal Value Terminal Value = [D(4)*(1.08)]/(0.13-.08) CF(1) = 2.73 CF(2) = 3.41 CF(3) = 4.27 CF(4) = 4.91

06 Terminal value = [4.91*(1.08)]/(0.13-0.08) = 106 NPV = 76.00 We then set up a discounting problem with our CFs and set them equal to $76 and solve for D(1) which ends up being $2.73.

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