Reference no: EM133037392

Problem - Activity - Stock Valuation - Investors require a 10 percent per year return on the stock of the Raby's Corporation, which anticipates a non-constant growth pattern for dividends. The company paid a $2.50 per share dividend. The dividend is expected to grow by 15 percent per year until the end of year 4 (i.e., for the next 3 years) and 7 percent thereafter. Determine the following:

(a) Project dividends for years 1 through 4.

(b) Compute the present value of the dividends in part (a).

(c) Project the dividend for the fifth year (D5).

(d) Find the present value of all future dividends beginning with the fifth year's dividend. The present value you find will be at the end of the fourth year. Use the formula P4= D5/(r-g).

(e) Discount back the value found in part (d) for 4 years at 10 percent.

(f) Determine the value of the stock Po.