bob., is a young start-up company. No dividends will be paid on the stock over t

Question

bob., is a young start-up company. No dividends will be paid on the stock over the next nine years, because the firm needs to plow back its earnings to fuel growth. The company will pay a $15 per share dividend in 10 years and will increase the dividend by 5 percent per year thereafter. If the required return on this stock is 14.5 percent, what is the current share price? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

bob., is a young start-up company. No dividends will be paid on the stock over the next nine years, because the firm needs to plow back its earnings to fuel growth. The company will pay a $15 per share dividend in 10 years and will increase the dividend by 5 percent per year thereafter. If the required return on this stock is 14.5 percent, what is the current share price? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

Explanation / Answer

Here we shall first calculate the share price in ninth year and then discount it to current year.

Dividend in year 10= $15

Expected rate = 14.5%

growth rate = 5%

P9 = ?

P9 = Div10/(exp rate- growth rate)

      = 15/(14.5%-5%)

      =157.8947

so the price of the share in ninth year is $157.8947

now P0 = P9/[(1+r)^9]

             = 157.8947/(1.145)^9

             = 157.8947/ 3.3826

             = $ 46.6785

so the current price of the share is $46.68

Related Questions

Navigate

• Browse (All)
• Browse B
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.