You are considering investing in Jones Industries’ common stock. Jones is a star

Question

You are considering investing in Jones Industries’ common stock. Jones is a start-up computer manufacturing company that is currently unable to pay dividends to its common shareholders. Analysts believe that Jones will not pay a dividend until three years from today. Jones' first dividend is expected to be $3/share, which will grow at a 10% rate for four consecutive years. The long-term growth rate in dividends is expected to be 6% thereafter. Find the present value of the stock if your required rate of return is 25%. Round intermediate steps to four decimals and your final answer to two decimals.

17.48

10.96

30.55

11.18

Please show what Formula was used and work

Explanation / Answer

D3 = 3

D4 = 3(1+.10) = 3.3

D5 = 3.3(1+.1) =3.63

D6 = 3.63(1+.1) = 3.993

D7 = 3.993(1+.1) = 4.3923

Terminal value at year 7 = D7(1+g8)/(Rs-g)

                              = 4.3923 (1+.06) /(.25-.06)

                              = 4.3923 *1.06 /.19

                             = 24.5044

Prsent value of dividend = (PVF@25%,3*D3)+(PVF@25%,4*D4 )...........(PVF@25%,7*D7)+(PVF@25%,7 *Terminal value)

=( .512*3)+(.4096*3.3)+(.32768*3.63)+(.26214*3.993)+(.20972*4.3923)+(.20972* 24.5044)

= 1.536+ 1.3517+ 1.1895+ 1.0467+ .9212+ 5.1391

    = 11.18

correct option is "D"

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