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Currently, Non-Stick Gum Inc. pays no dividend. However, analysts forecast that in 4 years Non-Stick will...

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

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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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