Question

Phoenix Industries has pulled off a miraculous recovery. Four years ago it was near bankruptcy. Today, it announced a $3 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 (in which dividends are $5 per share) dividend growth is expected to settle down to a more moderate long-term growth rate of 6%. Of the firm’s investors expect to earn a return of 16% on this stock, what must be its price?

Answer 1

Answer:

$40.78

Explanation:

To calculate the price of Phoenix's stock we can use the following formula:

stock price = dividend / (1 + rⁿ) + PV (dividend / (r - g)

stock price = $3 / 1.16 + $4 / 1.16² + $5 / 1.16³ + PV ($5 / ( 16%- 6%)

stock price = $2.58 + $2.97 + $3,20 + PV ($50)

stock price = $8,75 + (50 / 1.16³) = $8,75 + $32.03 = $40.78