Question

g Phoenix industries has pulled off a miraculous recovery. Four years ago it was near bankruptcy. Today, it was announced a $1 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 dividends growth is expected to settle down to a more moderate longterm growth rate of 8%. If the firm's investors expect to earn a return of 16% on this stock, what must the price be

Answer 1

Answer:

Market Share price $ 31,12

Explanation:

The price of the stock will be the same as the present value of their dividends:

Year        Dividend   Presnet Value

First year $1,00 $ 0,8621

Second   $2,00 $  1,7241

Third       $3,00 $  2,5862

Total Value         $  5,1724

Now, we solve for the horizon value

3 x (1.08) / (0.16 - 0.08) = 40,50

And, as this is three year ahead we also discounted like the other dividends:

$\frac{Maturity}{(1 + rate)^{time} } = PV$  

Maturity  40,50

time   3,00  

rate  0,16

$\frac{40,5}{(1 + 0,16)^{3} } = PV$  

PV   25,95  

And last, we add up the horizon with the other dividends:

5.17 + 25,95 = 31,12