•21. Sports Novelties, Inc., has experienced an explosion in demand for its feat

Question

•21. Sports Novelties, Inc., has experienced an explosion in demand for its feathered football novelties. The firm currently (time 0) pays a dividend of $0.25 per share. This dividend is expected to increase to $0.75 per share 1 year from now. It is expected to grow at a rate of 15 percent per year for the following 7 years. Coley, anaiveinvestor,seeksyouradviceregardingthecurrentvalueofthisstock.Coley plans to purchase this stock today, if the price is right, and to hold it for 3 years. He believes that the stock will increase in value to $30 at the end of 4 years. What is the current value of this stock to Coley if he requires a 20 percent rate of return on stocks of this risk level?

Explanation / Answer

For Coley All Amounts in $ Calculation of Current Value of Dividend, based on expected trends Year Dividend 0 0.25 1 0.75 2 0.8025 3 0.858675 4 0.918782 5 0.983097 6 1.051914 7 1.125548 8 1.204336 With an expected return on stock of 20%, the current value of the stock for Coley will be 6.02 $

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