1. A start-up was founded 10 years ago. It has been profitable for the last 5 ye
ID: 2628811 • Letter: 1
Question
1. A start-up was founded 10 years ago. It has been profitable for the last 5 years,
but it has needed all of its earnings to support growth and thus has never paid a dividend.
Management has indicated that it plans to pay a $0.25 dividend 3 years from today, then to
increase it at a relatively rapid rate for 2 years, and then to increase it at a constant rate of
8.00% thereafter. Management's forecast of the future dividend stream, along with the
forecasted growth rates, is shown below. Assuming a required return of 11.00%, what is your
estimate of the stock's current value?
Year 0 1 2 3 4 5 6
Growth rate NA NA NA NA 50.00% 25.00% 8.00%
Dividends $0.000 $0.000 $0.000 $0.250 $0.375 $0.469 $0.506
2.)
A company
Explanation / Answer
1.
Po = 0.25 / 1.11^3 + 0.25 * 1.5 / 1.11^4 + 0.25 * 1.5 * 1.25 / 1.11^5 + 0.25 * 1.5 * 1.25 * 1.08 / 1.11^6 * ( summation of the term ( 1.08 / 1.11 )^n for n from 0 to infinity )
.:
Po = 0.7080 + 0.25 * 1.5 * 1.25 * 1.08 / 1.11^6 / ( 1 - 1.08 / 1.11 )
Po = $10.72
2.
PO = 1.30/(1+.12)^1 + 1.40/(1+.12)^2 + 1.50/(1+.12)^3+ 1.60/(1+.12)^4 + (28 + 1.70)/(1+.12)^5= 21.21
Answer is 21.21 (or 21.20)
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