Question

A start up company has declared that it will not pay any dividends on its stock over the next 9 years because it requires all of its earnings to be plowed back into the business to fuel growth. The firm will pay a $14 per share dividend 10 years from today and will increase the dividend by 3.9% per year thereafter. If the required rate of return on this stock is 12.5%, what is the current share price

Answer 1

$56.40

Step-by-step explanation:

Value of the share = D10/(r-g)

Value of the share = 14/(0.125-0.039)

Value of the share = 14/0.086

Value of the share = $162.79

The current price of the share = Value of the share / (1+R)^9

The current price of the share = 162.79/1.125^9

The current price of the share = 162.79/2.88650757819

The current price of the share = 56.39687254937967

The current price of the share = $56.40