Question

"Finance3000" is a young start-up company. It will not pay any dividends on its stock over the next nine years because it plans to use retained earnings on expanding its business. "Finance3000" will pay a $10 per share dividend 10 years from today. After that the company will increase the dividend by 5 percent per year, in perpetuity. The required return on this stock is 11.5 percent. Calculate the value of one share of "Finance3000"'s stock. (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Answer 1

The stock will be correctly priced at $54.39

Step-by-step explanation:

we solve for the value of the dividends using the gordon model:

`(D_1)/((r-g)) =PV\\(D_0(1+g))/((r-g)) =PV\\`

(10 x 1.05) / (0.115 - 0.05) = 161.5384615

ow, as this is 10 years into the future we have to discount this for 10 years:

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

Maturity $161.5385

time 10.00 years

rate 0.11500 (we use the required rate of return)

`(161.538461538462)/((1 + 0.115)^(10) ) = PV`

PV 54.3910

The stock will be correctly priced at $54.39