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Drupady [299]
3 years ago
10

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 $0.75 coming 3 years from today. The dividend should grow rapidly - at a rate of 70% per year - during Years 4 and 5. After Year 5, the company should grow at a constant rate of 6% per year. If the required return on the stock is 13%, what is the value of the stock today (assume the market is in equilibrium with the required return equal to the expected return)
Business
1 answer:
raketka [301]3 years ago
4 0

Answer:

The current value of stock is $20.40

Explanation:

D3 = $0.75

The Growth rate for Year 4 & Year 5 is 70%. The experience after was constant growth rate (g) of 6%

D4 = $0.75 * 1.70 = $1.28

D5 = $1.28 * 1.70 = $2.18

D6 = $2.18 * 1.06 = $2.31

To get the Value of stock, r = 16%

P5 = D6 / (r - g)

P5 = $2.31 / (0.13 - 0.06)

P5 = $2.31 / 0.07

P5 = $33

P0 = $0.75/1.13^3 + $1.28/1.13^4 + $2.18/1.13^5 + $33/1.13^5

P0 = $0.75/1.4429 + $1.28/1.6305 + $2.18/1.8424 + $33/1.8424

P0 = $0.5198 + $0.7850 + $1.1832 + $17.9114

P0 = $20.3994

P0 = $20.40

So, current value of stock is $20.40

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