Question

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

Answer 1

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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