Question

You are an analyst in charge of valuing common stocks. You have been asked to value two stocks. The first stock NEWER Inc. just paid a dividend of $4.00. The dividend is expected to increase by 90%, 75%, 60%, 45%, 30% and 15% per year respectively during the next six years. Thereafter the dividend will increase by 4% per year in perpetuity. a) Calculate NEWER’s expected dividend for t = 1, 2, 3, 4, 5, 6 and 7. The required rate of return for NEWER stock is 14% compounded annually. b) What is NEWER’s stock price? The second stock is OLDER Inc. OLDER Inc. will pay its first dividend of $10.00 two (2) years from today. The dividend will increase by 30% per year for the following three (3) years after its first dividend payment. Thereafter the dividend will increase by 3% per year in perpetuity. c) Calculate OLDER’s expected dividend for t = 1, 2, 3, 4, 5, and 6. The required rate of return for OLDER stock is 16% compounded annually. d) What is OLDER’s stock price? Now assume that both stocks have a required rate of return of 30% per year compounded annually for the first four years, 25% per year compounded annually for the following five years, and thereafter the required rate of return will be 12% compounded annually. e) What is NEWER’s stock price? f) What is OLDER’s stock price? (Hint: you may need to forecast more dividends than you did in parts a, and c.) Note 1: You cannot use the NPV function to immediately value the stocks at time 0, as the required rate of return changes during the forecast period. Note 2: All calculations should be rounded to the nearest cent. That is 2 decimal places.

          You are an analyst in charge of valuing common stocks. You have been asked to value two stocks. The first stock NEWER Inc. just paid a dividend of $4.00. The dividend is expected to increase by 90%, 75%, 60%, 45%, 30% and 15% per year respectively during the next six years. Thereafter the dividend will increase by 4% per year in perpetuity. 
a) Calculate NEWER’s expected dividend for t = 1, 2, 3, 4, 5, 6 and 7.
The required rate of return for NEWER stock is 14% compounded annually.
b) What is NEWER’s stock price?
The second stock is OLDER Inc. OLDER Inc. will pay its first dividend of $10.00 two (2) years from today. The dividend will increase by 30% per year for the following three (3) years after its first dividend payment. Thereafter the dividend will increase by 3% per year in perpetuity. 
c) Calculate OLDER’s expected dividend for t = 1, 2, 3, 4, 5, and 6.
The required rate of return for OLDER stock is 16% compounded annually.
d) What is OLDER’s stock price?
Now assume that both stocks have a required rate of return of 30% per year compounded annually for the first four years, 25% per year compounded annually for the following five years, and thereafter the required rate of return will be 12% compounded annually.
e) What is NEWER’s stock price?
f) What is OLDER’s stock price?
(Hint: you may need to forecast more dividends than you did in parts a, and c.)
Note 1: You cannot use the NPV function to immediately value the stocks at time 0, as the required rate of return changes during the forecast period. 
Note 2: All calculations should be rounded to the nearest cent. That is 2 decimal places.

Added by Kelly B.

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