Question

Hi-Tek is a young start-up company. No dividends will be paid on the stock over the next 15 years, because the firm needs to plow back its earnings to fuel growth. The company plans to pay a $6 per share dividend in 16 years and will increase the dividend by 4 percent per year thereafter. What is the current share price if the required return on this stock is 16 percent?
A. $5.62.
B. $8.59.
C. $5.40.
D. $50.00.

Answer 1

Answer:

current share price = $5.40

so correct option is C. $5.40

Explanation:

given data

dividends paid = 15 years

pay = $6 per share

increase = 4%

to find out

current share price

solution

we know that Value after year 15 will be = ( D15 × Growth rate) ÷ (required return - growth rate)     ......................1

put here value

Value after year 15 = $\frac{6*(1+0.4)}{0.16 - 0.04}$

Value after year 15 = $52

so here  current share price will be

current share price  = Future dividends × Present value of discounting factor

current share price = $\frac{6}{(1+0.16)^{16}}+\frac{52}{(1+0.16)^{16}}$

current share price = $5.40

so correct option is C. $5.40