ABC Corporation started business in 2005. The growth rate for the first 4 years was exceptional i.e 25% per year. After the fourth year the growth rate became constant at 6 percent. The treasury bills offer 5%, while market offers on investment equal 12%. The beta for the company is 0.85. Investment consists of $35 million and equity consists of 8 million preferred stocks and 19 million common stocks. The latest dividend issued was $4. The free cash flow stream for the last 5 years have been, -2 million, 3 million, 3.5 million, 5 million and 10 million. The company paid taxes at the rate of 35%
a) Calculate the stock value for year 1 using the discounted dividend model.
b) What is the dividend yield and capital gains yield?
c) Is the stock value you get by using Discounted Dividend Model different from the value obtained using the Corporate Valuation Model?