*Please show all work to step by step including calculations to be chosen as bes

Question

*Please show all work to step by step including calculations to be chosen as best answer*

You want to invest in MicroSoft Company. The MicroSoft currently is paying no dividend because of depressed earnings. A recent change in management promises, however, a brighter future. Investors expect Micro Soft to pay a dividend of $1 next year (the end of the year). This dividend is expected to increase to $2 the following year and to grow at a rate of 10 percent per annum for the following two years (years 3 and 4). A good new investor, expects the price of the stock to increase 50 percent in value between now (time zero) and the end of year 3.

Explanation / Answer

Ans. Step 1 . Calculate the present value of the stock is calculated using the Dividend Discount model

Thus, value of stock (now expected ) = 5.87*1.50 = $8.805

Dividend Growth Rate (yr 1-2) 0% PV Rate 10.00% No of periods Year 0 0 Year (3-4) 10% 0 Year 1 1 0.9091 1 Year 2 2 1.6529 2 Year 3 2.2 1.6529 3 Year 4 2.42 1.6529 4 Value of Stock 5.87 Ans. Value of Stock is $5.87

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