Sawchuck Consulting has been profitable for the last 5 years, but it has never p

Question

Sawchuck Consulting has been profitable for the last 5 years, but it 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

a.) $9.94 b.) $10.19 c.) $10.45 d.) $10.72 e.) $10.99

Explanation / Answer

Calculation of current stock price=D3/(1+r)3+D4/(1+r)4+D5/(1+r)5+1/(1+r)6*D6/(g-r)

where r= required return and g= growth

                                                =.25*.731+.375*.659+.469*.593+1.536*.506/(.11-.08)

                                                 =.18275+.2471+.2781+9.040

                         current price    =$9.75 or 9.94

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