Alphabet class C stock will start paying dividends in the near future because of all of the cash flow that it generates (coupled with a nearly $70 billion cash balance). When pressed on the issue, Frank made a forecast that Alphabet will start paying its first dividend 4 years from now in the amount of $26 per share. Over the following 10 years, Frank projected that the dividends would grow by 12% per year, after which the growth rate would be a constant rate of 5%, forever. Alphabet has a debt-to-equity ratio of 0.2 and an after-tax cost of debt of 4.2%. If the risk-free rate is 2.24%, the market risk premium is 6.5% and Alphabet’s Beta is 0.9, what should the stock sell for today based on a discounted valuation of the future dividends projected?
This question was answered on: Sep 21, 2023
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