Question

g Phoenix industries has pulled off a miraculous recovery. Four years ago it was near bankruptcy. Today, it was announced a $1 per share dividend to be paid a year from now, the first dividend since the crisis. Analysts expect dividends to increase by $1 a year for another 2 years. After the third year dividends growth is expected to settle down to a more moderate longterm growth rate of 8%. If the firm's investors expect to earn a return of 16% on this stock, what must the price be

Answer 1

Market Share price $ 31,12

Step-by-step explanation:

The price of the stock will be the same as the present value of their dividends:

Year Dividend Presnet Value

First year $1,00 $ 0,8621

Second $2,00 $ 1,7241

Third $3,00 $ 2,5862

Total Value $ 5,1724

Now, we solve for the horizon value

3 x (1.08) / (0.16 - 0.08) = 40,50

And, as this is three year ahead we also discounted like the other dividends:

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

Maturity 40,50

time 3,00

rate 0,16

`(40,5)/((1 + 0,16)^(3) ) = PV`

PV 25,95

And last, we add up the horizon with the other dividends:

5.17 + 25,95 = 31,12