Question

Currently, Non-Stick Gum Inc. pays no dividend. However, analysts forecast that in 4 years Non-Stick will pay its first annual dividend of $.50 and dividends will grow at 6% per year thereafter. If stocks with similar risk to the equity of Non-Stick Gum currently earn a return of 12%, estimate the current share price(today)of Non-Stick

Answer #1

Dividend n Year-4 : 0.50 | ||||||||

Expected dividend in Year -5 = 0.50 + 6% = 0.53 | ||||||||

Horizon value in Year-4 = Expected dividend of Year-5 / (Required rate-Growth rate) | ||||||||

0.53 / (12-6)% = 8.83 | ||||||||

Price of Share today | ||||||||

Total cashflows in Year-4 | ||||||||

Dividend | 0.5 | |||||||

Horizon value | 8.83 | |||||||

Total cashflows in Year-4 | 9.33 | |||||||

Multiply: PVF at 12% for 4th year | 0.635518 | |||||||

Stock price today | 5.929383 | |||||||

Answer is $ 5.93 | ||||||||

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