Question

Cullumber, Inc., management expects to pay no dividends for the next six years. It has projected...

Cullumber, Inc., management expects to pay no dividends for the next six years. It has projected a growth rate of 25 percent for the next seven years. After seven years, the firm will grow at a constant rate of 5 percent. Its first dividend, to be paid in year 7, will be $3.36. If the required rate of return is 19 percent, what is the stock worth today?

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Answer #1

Given no dividends are paid for first 6 years

From year 7, growth rate = 5%

Required rate of return = 19%

Dividend in year 7 = $3.36

PVIF at 19%

Present Value

D1

$0

0.8403

$0

D2

$0

0.7062

$0

D3

$0

0.5934

$0

D4

$0

0.4987

$0

D5

$0

0.4191

$0

D6

$0

0.3521

$0

D7

$3.36

0.2959

$0.9942

D8

$3.36*(1+ 0.05) =$3.53

0.2487

$0.8779

D9

$3.53*(1+ 0.05) =$3.71

Stock price in 8 years

3.71/ (0.19-0.05) = $26.5

0.2487

$6.5906

Total

$8.4627

Stock price today = $8.46

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