ACC501 GDB No. 2 Solution
Tuesday, January 11, 2011 Posted In Acc Edit ThisSolution:
Chain Reaction, Inc., has been growing at a phenomenal rate of 30% peryear.
•You believe that this rate will last for only three more years.
•Then, you think the rate will drop to 10% per year.
•Total dividends just paid were $5 million.
•The required rate of return is 20%.
•What is the total value of Chain Reaction, Inc.?
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Total Marks 2
Starting Date Tuesday, January 11, 2011
Closing Date Wednesday, January 12, 2011
Status Open
Question/Description
Starting Date Tuesday, January 11, 2011
Closing Date Wednesday, January 12, 2011
Status Open
Question/Description
- Consider a company ABC has been growing at a phenomenal rate of 35% per year. You expect that this growth rate to last for 2 years and the rate will then drop to 10% per year. The growth rate then remains at 10% indefinitely.
- Total dividends just paid were Rs.5 million and required return is 25%.Calculate the total dividend over the supernormal growth period (year 1 and year 2) and the price at year 2.Note: calculations are not required, only answers are required.
Solution:
Solution is as under:-
Dividends
Year 1: $ 6.75 million
Year 2: $ 9.1125 million
Price at year 2: $ 66.82
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First Calculate the total dividends over the supernormal growth period
Year Total Dividend: (in $millions)
1 5 * 1.35 = 6.75
2` 6.75*1.35= 9.1125
Using the long run growth rate g the value of all the shares at time 2 can be calculated as:
V (2) = [D (2)*(1+g)] / (k-g)
V (2) = [9.1125*1.10] / (.25-.10) = $66.825
