Answer:
To determine the current price of Dewpoint Inc.'s common share price, we can use the Dividend Discount Model (DDM), which calculates the present value of all future dividends discounted back to the present at the company's required rate of return.
The formula for the Dividend Discount Model (DDM) is as follows:
\[ P_0 = \frac{D_1}{(1 + r)} + \frac{D_2}{(1 + r)^2} + \frac{D_3}{(1 + r)^3} + \frac{D_4}{(1 + r)^4} + \frac{D_5}{(1 + r)^5} + \ldots \]
Where:
\( P_0 \) = Current price of the stock (what we want to find)
\( D_1 \) = Dividend to be received in Year 1
\( D_2 \) = Dividend to be received in Year 2
\( D_3 \) = Dividend to be received in Year 3
\( D_4 \) = Dividend to be received in Year 4
\( r \) = Required rate of return (15% or 0.15 as a decimal)
We are given the dividends for the first four years, and for subsequent years, the dividends are expected to grow at an annual rate of 2.25%.
Let's calculate the current price of Dewpoint Inc.'s common share price using the provided information:
\[ P_0 = \frac{0.50}{(1 + 0.15)} + \frac{1.00}{(1 + 0.15)^2} + \frac{1.00}{(1 + 0.15)^3} + \frac{1.20}{(1 + 0.15)^4} + \frac{(1.20 \times 1.0225)}{(1 + 0.15)^5} \]
\[ P_0 = \frac{0.50}{1.15} + \frac{1.00}{1.3225} + \frac{1.00}{1.5204} + \frac{1.20}{1.7490} + \frac{1.2285}{2.0114} \]
\[ P_0 ≈ 0.4348 + 0.7565 + 0.6584 + 0.6855 + 0.6112 \]
\[ P_0 ≈ 3.1464 \]
So, the current price of Dewpoint Inc.'s common share price, based on the provided information and using the Dividend Discount Model with a required rate of return of 15%, is approximately $3.15 per share.