Question

# QUESTION 9 Nu-Tek is expanding rapidly. As a result, the company expects to pay annual dividends...

QUESTION 9

1. Nu-Tek is expanding rapidly. As a result, the company expects to pay annual dividends of \$0.5, \$0.65, and \$0.75 per share over the next three years, respectively. After that, the dividend is projected to increase by 2 percent annually. What is the current value of this stock if the required return is 12 percent?

 \$8.94 \$9.94 \$5.94 \$6.94 \$7.94

The current value of the stock is computed as shown below:

= Dividend in year 1 / (1 + required rate of return)1 + Dividend in year 2 / (1 + required rate of return)2 + Dividend in year 3 / (1 + required rate of return)3 + 1 / (1 + required rate of return)3[ ( Dividend in year 3 (1 + growth rate) / ( required rate of return - growth rate) ]

= \$ 0.50 / 1.12 + \$ 0.65 / 1.122 + \$ 0.75 / 1.123 + 1 / 1.123 [ ( \$ 0.75 x 1.02) / ( 0.12 - 0.02) ]

= \$ 0.50 / 1.12 + \$ 0.65 / 1.122 + \$ 0.75 / 1.123 + \$ 7.65 / 1.123

= \$ 6.94 Approximately

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