Solinux, Inc., is a young start-up company and will not pay dividends on its sto

Question

Solinux, Inc., is a young start-up company and will not pay dividends on its stock for the next 8 years, since the firm needs to plow back its earnings to fuel growth. The company will then pay a $2.22 per share dividend in year 9 and will increase the dividend by 5.7 percent per year thereafter. If investors require 7.9 percent return to invest in this stock, what is its current share price? (Do not include the dollar sign ($). Round your answer to 2 decimal places (e.g., 32.16).

Please show all steps

Explanation / Answer

Current Share Price = 53.88

working

Dividend payable in year 9 = $ 2.22 per share

Expected growth rate of dividend g = 5.7% or 0.057

Required rate of return r = 7.9% or 0.079

Expected Dividend D(10) = $ 2.22 * 1.057 = $ 2.34654 or $ 2.35 (rounded off)

Present Value of Dividends in year 9 = D1 /(r-g) = $ 2.35 /(0.079 – 0.057)

                                                                  = $ 2.35 / 0.022 = $ 106.81818 or $ 106.82 (rounded off)

Current share price will be present value of the above value viz., $ 106.82 discounted at 7.9% for 9 years

Current Share Price = $ 106.82 / 1.079^9 = $ 106.82 / 1.9824078 = $ 53.8839 or $ 53.88 (rounded off)

Related Questions

Navigate

• Browse (All)
• Browse S
• Subjects

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