Question

# Big Red Machines, a startup, has come up with a new product and has seen significant...

Big Red Machines, a startup, has come up with a new product and has seen significant customer demand. Due to reinvestment in the firm (100% plowback ratio) Big Red Machines will pay no dividends in the first 2 years. Beginning in the 3rd through 6th years, the firm expects to pay \$1.50, \$1.60, and \$1.75 In the 6th year, the firm should see stable growth rates and thus begin a divided which grows at 3% per year. You plan to graduate 1 year from now, and hope to invest in Big Red Machines at that time. The expected rate of return is 8% What is the value of Big Red Machine's stock one year from today? ; Do not round your intermediate calculations. Round your final answer to two decimal places.

The value of the stock is computed as shown below:

= Dividend in year 3 / (1 + required rate of return)2 + Dividend in year 4 / (1 + required rate of return)3 + Dividend in year 5 / (1 + required rate of return)4 + 1 / (1 + required rate of return)4 [ ( Dividend in year 5 (1 + growth rate) / ( required rate of return - growth rate) ]

= \$ 1.50 / 1.082 + \$ 1.60 / 1.083 + \$ 1.75 / 1.084 + 1 / 1.084 x [ (\$ 1.75 x 1.03) / (0.08 - 0.03) ]

= \$ 1.50 / 1.082 + \$ 1.60 / 1.083 + \$ 1.75 / 1.084 + \$ 36.05 / 1.084

= \$ 1.50 / 1.082 + \$ 1.60 / 1.083 + \$ 37.80 / 1.084

= \$ 30.34

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