Question

Global Tek is a new firm in a rapidly growing industry. The company is planning on increasing its annual dividend by 15 percent a year for the next four years and then decreasing the growth rate to 3.5 percent per year. The company just paid its annual dividend in the amount of $.20 per share. What is the current value of one share of this stock if the required rate of return is 15.5 percent

Answer 1

Answer:

$2.49

Explanation:

The calculation of current value is shown below:-

Since we need to compute the current value so firstly we to find out tje horizontal value which is below:-

Horizontal value = 0.2 × 1.15^4 × 1.035 ÷ (15.5% - 3.5%)

= 3.017035781

Now,

Current value

= 0.2 × 1.15 ÷ 1.155 + 0.2 × 1.15^2 ÷ 1.155^2 + 0.2 × 1.15^3 ÷ 1.155^3 + 0.2 × 1.15^4 ÷ 1.155^4 + 3.017035781 ÷ 1.155^4

= $2.49