Question

Hi-Tek is a young start-up company. No dividends will be paid on the stock over the next 15 years, because the firm needs to plow back its earnings to fuel growth. The company plans to pay a $6 per share dividend in 16 years and will increase the dividend by 4 percent per year thereafter. What is the current share price if the required return on this stock is 16 percent?

A. $5.62.
B. $8.59.
C. $5.40.
D. $50.00.

Answer 1

current share price = $5.40

so correct option is C. $5.40

Step-by-step explanation:

given data

dividends paid = 15 years

pay = $6 per share

increase = 4%

to find out

current share price

solution

we know that Value after year 15 will be = ( D15 × Growth rate) ÷ (required return - growth rate) ......................1

put here value

Value after year 15 =
`(6*(1+0.4))/(0.16 - 0.04)`

Value after year 15 = $52

so here current share price will be

current share price = Future dividends × Present value of discounting factor

current share price =
`(6)/((1+0.16)^(16))+(52)/((1+0.16)^(16))`

current share price = $5.40

so correct option is C. $5.40