Hi-Tek is a young start-up company. No dividends will be paid on the stock over the next 9 years, because the firm needs to plow

Question

2 years ago

7

Hi-Tek is a young start-up company. No dividends will be paid on the stock over the next 9 years, because the firm needs to plow

back its earnings to fuel growth. The company plans to pay a $6 per share dividend in 10 years (that is, at t = 10) 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 14 percent?

Business

2 answers:

Elza [17] · Answer 1 · 2022-10-10T03:34:06+03:00

Answer:

The price of the stock today is $16.83

Explanation:

The current price per share can be estimated using constant growth model of the DDM. The price per share can be calculated using the following formula,

P0 = D1 / r - g

To calculate the price today, we use the dividend expected for the next period. Thus, using the dividend that will be paid at t=11 or D11, we can calculate the price of the stock at t=10. We further need to discount this price using the required rate of return for 10 years to calculate the price of the stock today.

P10 = 6 * (1+0.04) / (0.14 - 0.04)

P10 = $62.4

The price of the stock today will be,

P0 = 62.4 / (1.14)^10

P0 = $16.83

Andrew [12] · Answer 2 · 2022-10-10T04:42:09+03:00

Answer:

Current share price = $18.45

Explanation:

<em>The Dividend Valuation Model is a technique used to value the worth of a stock . According to this model, the value of a stock is the sum of the present values of the future dividends discounted at the required rate of return.</em>

The share price would be determined using the dividend valuation model as follows:

P = Do×(1+g)/(ke-g)

P- price , Ke- cost of equity, g- growth rate in dividend

P-? g- 4%, Ke- 14%, D(1+g) = future dividend

Price in year 9 = 6/(0.14-0.04)

=$60

Price today

To calculate the price today, the price in year 9 would be discounted at the rate of 14% per annum.

Price now = 60 × (1.14)^(-9)

= $18.45