Question

The RMC is a new firm in a rapidly growing industry. The company is planning on increasing its annual dividend by 15% a year for the next three years and then decreasing the growth rate to 2.2% per year. The company just paid its annual dividend in the amount of $1.00 per share. Also the required rate of return on the Rocket Medical Co. is 10.50%

What is the value of one share of The RMC at time-3?

What is the value of one share of The RMC now, time-0?

Answer 1

Particulars	Amount	Calculation
D0	1
D1	1.15	1(1.15)
D2	1.3225	1.15(1.15)
D3	1.520875	1323(1.15)
D4	1.487416	1.521(1-0.022)

value of one share of The RMC at time-3

P3 = D4/ (ke-g)

= 1.487 / (0.105- (-0.022))

= 1.487 / (0.105 +0.022)

= 1.487 / 0.127

= 11.71

value of one share of The RMC at time-0

Particulars	Amount	[email protected]%	Disc CF
D1	$   1.150	0.9050	$   1.041
D2	$   1.323	0.8190	$   1.084
D3	$   1.521	0.7412	$   1.127
P3	$ 11.710	0.7412	$   8.679
Prcie at t= 0	$ 11.931

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