Question

Simpkins Corporation does not pay any dividends because it is expanding rapidly and needs to retain all of its earnings. However, investors expect Simpkins to begin paying dividends, with the first dividend of $0.50 coming 3 years from today. The dividend should grow rapidly - at a rate of 65% per year - during Years 4 and 5. After Year 5, the company should grow at a constant rate of 7% per year. If the required return on the stock is 18%, what is the value of the stock today (assume the market is in equilibrium with the required return equal to the expected return?

Answer 1

The stock will trade for 4.30 dollars in the market

Step-by-step explanation:

The stock will be valued at the discounted value of their future cash flow.

w calculate the cas flow by multiplying by the grow rate given.

Then we discount using the present value of a lump sum:

`(Maturity)/((1 + rate)^(time) ) = PV`

Maturity $0.5000

time 3.00

rate 0.18

`(0.5)/((1 + 0.18)^(3) ) = PV`

PV 0.30

Then, for the entire of the dividend after year 6th we use the gordon model:

dividends / (rate - grow) and then we discount that

`(dividends)/(return - growh)`

Y# Cashflow Discounted

0 0

1 0

2 0

3 0.5 0.304315436

4 0.825 0.425525822

5 1.36125 0.595014921

6 1.4565375 2.971555503

Total 4.296411682