Question

Staton-Smith Software is a new start-up company and will not pay dividends for the first five years of operation. It will then institute an annual cash dividend policy of $4.50 with a constant growth rate of 6%, with the first dividend at the end of year six. The company will be in business for 25 years total. What is the stock's price if an investor wants

a. a return of 11%?

b. a return of 15%?

c. a return of 24%?

d. a return of 38%?

Answer #1

Rate | Stock price | |

a | 11% | $32.16 |

b | 15% | $19.99 |

c | 24% | $8.16 |

d | 38% | $2.80 |

Workings

Dividends are as follows

Year | Dividend |

1 | 0.00 |

2 | 0.00 |

3 | 0.00 |

4 | 0.00 |

5 | 0.00 |

6 | 4.50 |

7 | 4.77 |

8 | 5.06 |

9 | 5.36 |

10 | 5.68 |

11 | 6.02 |

12 | 6.38 |

13 | 6.77 |

14 | 7.17 |

15 | 7.60 |

16 | 8.06 |

17 | 8.54 |

18 | 9.05 |

19 | 9.60 |

20 | 10.17 |

21 | 10.78 |

22 | 11.43 |

23 | 12.12 |

24 | 12.84 |

25 | 13.62 |

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