1 WTF is expanding rapidly, and it currently needs to retain all of its earnings

Question

1 WTF is expanding rapidly, and it currently needs to retain all of its earnings, hence it does 2 not pay any dividends. However, investors expect WTF to begin paying dividends, with 3 the first dividend D2 coming 2 years from today. The dividend should grow rapidly--at a 4 rate of g3,4 per year-during years 3 and 4. After year 4, the company should grow at a 5 constant rate of g per year. If the required return on the stock is rs, what is the value of the 1 stock today (Po)? 8 INPUT DATA D2 25% 14% $1.81 93,4 3.50% 10 Po

Explanation / Answer

P0 = D2 / Rs

P0 = Value of Stock today

D2 = Dividend to be paid after 2 years from today

Rs = Return on Stock

P0 = D2 / Rs

P0 = $1.81 / .14

P0 = $12.93

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