4. JEF Inc. just paid a $1.30 dividend, and it is expected to grow at 40% for the next 3 years. After 3 years the dividend is expected to grow at the rate of 7% indefinitely. If the required return is 12.7%, what is the stock's value today

The stock's value today is $53.33

Explanation:

The value of a stock can be calculated by determining the present value of associated cash flows

First, we need to calculate the expected dividend each year

Year Dividend

1$1.30 x ( 1 + 40% ) = $1.8200

2$1.82 x ( 1 + 40% ) = $2.5480

3$2.548 x ( 1 + 40% ) = $3.5672

4$3.5672 x ( 1 + 7% ) = $3.8169

Now calculate the present value of the dividends

Year Present value

1$1.8200 x ( 1 + 12.7% )^-1 = $2.0511

2$2.5480 x ( 1 + 12.7% )^-2 = $2.0061

3$3.5672 x ( 1 + 12.7% )^-3 = $2.4920

4[ $3.8169 / ( 12.7% - 7% ) ] x ( 1 + 12.7% )^-3 = $46.7804

Hence,

Value of Stock = $2.0511 + $2.0061 + $2.4920 + $46.7804 = $53.3296 = $53.33

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