Question

Simpkins Corporation does not pay any dividends because it is expanding rapidly and needs to retain all of its earnings. However, investors expect Simpkins to begin paying dividends, with the first dividend of $1.50 coming 3 years from today. The dividend should grow rapidly - at a rate of 75% per year - during Years 4 and 5. After Year 5, the company should grow at a constant rate of 7% per year. If the required return on the stock is 18%, what is the value of the stock today (assume the market is in equilibrium with the required return equal to the expected return)? Do not round intermediate calculations. Round your answer to the nearest cent.

Answer #1

Dividend: | ||||||

Year-3 | 1.5 | |||||

Year-4 | 1.5+ 75% | 2.63 | ||||

Year-5 | 2.63+75% | 4.59 | ||||

Year-6 | 4.59+7% | 4.92 | ||||

Horizon Value at Year-5 = Dividend of Yr-6 / (Required rate-Growth rate) | ||||||

4.92 / (18-7)% = 44.73 | ||||||

Stock pricec today | ||||||

Year | Cashflowws | PVF at 18% | Present value | |||

1 | 0 | 0.847458 | 0 | |||

2 | 0 | 0.718184 | 0 | |||

3 | 1.5 | 0.608631 | 0.912946 | |||

4 | 2.63 | 0.515789 | 1.356525 | |||

5 | 4.59 | 0.437109 | 2.006331 | |||

5 | 44.73 | 0.437109 | 19.5519 | |||

Stock price today | 23.83 | |||||

Simpkins Corporation does not pay any dividends because it is
expanding rapidly and needs to retain all of its earnings. However,
investors expect Simpkins to begin paying dividends, with the first
dividend of $1.50 coming 3 years from today. The dividend should
grow rapidly - at a rate of 75% per year - during Years 4 and 5.
After Year 5, the company should grow at a constant rate of 5% per
year. If the required return on the stock...

Simpkins Corporation does not pay any dividends because it is
expanding rapidly and needs to retain all of its earnings. However,
investors expect Simpkins to begin paying dividends, with the first
dividend of $1.50 coming 3 years from today. The dividend should
grow rapidly - at a rate of 70% per year - during Years 4 and 5.
After Year 5, the company should grow at a constant rate of 6% per
year. If the required return on the stock...

Simpkins Corporation does not pay any dividends because it is
expanding rapidly and needs to retain all of its earnings. However,
investors expect Simpkins to begin paying dividends, with the first
dividend of $0.50 coming 3 years from today. The dividend should
grow rapidly - at a rate of 50% per year - during Years 4 and 5.
After Year 5, the company should grow at a constant rate of 10% per
year. If the required return on the stock...

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expanding rapidly and needs to retain all of its earnings. However,
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grow rapidly - at a rate of 60% per year - during Years 4 and 5.
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expanding rapidly and needs to retain all of its earnings. However,
investors expect Simpkins to begin paying dividends, with the first
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grow rapidly - at a rate of 80% per year - during Years 4 and 5.
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