It is now January 1, 2008. Swink Electric, Inc. has just developed a solar panel

Question

It is now January 1, 2008. Swink Electric, Inc. has just developed a solar panel capable of generating 200 percent more electricity than any solar panel currently on the market. As a result, Swink is expected to experience a 15 percent annual growth rate for the next five years. When the five-year period ends other firms will have developed comparable technology, and Swink's growth rate will slow to 5 percent per year indefinitely. Stockholders require a return of 12 percent on Swink's stock. The firm's most recent annual dividend (D0), which was paid yesterday, was $1.75 per share. Calculate the value of the stock today.

Explanation / Answer

D1 = D0(1+g) = 1.75 (1+.15) = 2.0125

D2 = 2.0125 (1+.15) = 2.3144

D3 = 2.3144 (1+.15 ) = 2.6615

D4 = 2.6615 (1+.15) = 3.0608

D5 = 3.0608 (1+.15 ) = 3.5199

Terminal value at year5 = D5(1+g)/(Ke-g)

                             = 3.5199 (1 + .05 ) /(.12-.05)

                           = 3.5199 *1.05 / .07

                            = 52.7985

Prsent value = (PVF@12%,1* CF1)+(PVF@12%,2*CF2).........(PVF@12%,5*TV 5 )

           = (.89286*2.0125)+(.79719*2.3144)+(.71178*2.6615)+(.63552*3.0608)+(.56743*3.5199)+(.56743*52.7985)

      = 1.7969+ 1.8450+ 1.8944+ 1.9452+ 1.9973+ 29.9595

         = 39.44 per share

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