Question

Suppose Isenberg Unlimited has just paid a $1 dividend. Over the next 4 years, you estimate the dividends will increase 50%, 25%, 21% and 16% respectively. After that, dividends should grow at 15% per year. An appropriate discount rate for this firms is 17% a. Find D1, D2, D3, D4 and 05. b. Find the stock prion

Answer 1

To find the future dividends, you apply the given growth rates to the initial dividend. Then, calculate the present values of each dividend and sum them up using the appropriate discount rate. Finally, divide the sum of present values by the number of shares to find the stock price.

Step-by-step explanation:

To find the future dividends, we apply the given growth rates to the initial dividend of $1. The calculations are as follows:

1. D1 = $1 x (1 + 50%) = $1.50
2. D2 = $1.50 x (1 + 25%) = $1.88
3. D3 = $1.88 x (1 + 21%) = $2.28
4. D4 = $2.28 x (1 + 16%) = $2.64
5. D5 = $2.64 x (1 + 15%) = $3.04

To find the stock price, we calculate the present value of each dividend and sum them up. Using the appropriate discount rate of 17%, the calculations are:

1. PDV of D1 = $1.50 / (1 + 17%) = $1.28
2. PDV of D2 = $1.88 / (1 + 17%)^2 = $1.34
3. PDV of D3 = $2.28 / (1 + 17%)^3 = $1.35
4. PDV of D4 = $2.64 / (1 + 17%)^4 = $1.25
5. PDV of D5 = $3.04 / (1 + 17%)^5 = $1.22

The sum of the present values is $7.44. Dividing this by the number of shares (200), we get a price per share of $37.20.