Simpkins Corporation does not pay any dividends because it is expanding rapidly

Question

Simpkins Corporation does not pay any dividends because it is expanding rapidly and needs to retain all of it

Simpkins Corporation does not pay any dividends because it is expanding rapidly and needs to retain all of it's earnings. However, investors expect Simpkins to begin paying and dividends, with the first dividend of $.50 coming 3 years from today. The dividend should grow rapidly - at a rate of 80% per year - during years 4 and 5. After year 5, the company should grow at a constant rate of 7% per year. If the required return on the stock is 16%, what is the value of the stock today? (assume the market is in equilibrium with the required return equal to the expected return.)

Explanation / Answer

Given the dividend = 0.5 dollar per share

for three years = 0.5 $

on fourth year = 0.5 (1 + 80/100) = 1.8 * 0.5 =0.9 $ per share

on fifth year = 0.9 (1.8) = 1.62 $

on sixth year = 1.62 * ( 1+ 7/100) =1.7334$

total dividend = 0.5 + 0.9 + 1.62 + 1.7334 =4.7534 $ per share = 16 /100 * (share value )

Share value = 29.7 $

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