Question

Problem 7-13

Nonconstant Growth Stock Valuation

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 $1.00 coming 3 years from today. The dividend should grow rapidly - at a rate of 80% 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 is 17%, what is the value of the stock today (assume the market is in equilibrium with the required return equal to the expected return)? Round your answer to the nearest cent. Do not round your intermediate computations.

Answer #1

Hello,

Here is the solution -

**Dividend at year 3 = D _{3} = $1.00**

**Dividend at year 4 = D4 = $1.00 * 1.80 = $1.80**

**Dividend at year 5 = D _{5} = $1.80 * $1.80 =
$3.24**

**Compute D _{6} = $3.24 * 1.06 = $3.434 just to
use for constant growth model (DVM) for valuing dividends from year
6 to infinity**

**P _{5} = D_{6} / (k -g) = 3.434 /
(0.17-0.06) = $31.22**

**So, now if we calculate the NPV, that will be the value
of stock today**

**NPV = PV of cash flows = 1/(1.17) ^{3} +
1.8/(1.17)^{4}+3.24/(1.17)^{5} +
31.22/(1.17)^{5} = $17.30**

**So, the answer to your question is $17.30**

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 $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...

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 $0.75 coming 3 years from today. The dividend should
grow rapidly - at a rate of 60% 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 $2.00 coming 3 years from today. The dividend should
grow rapidly - at a rate of 65% 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...

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 $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...

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 80% 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 16%, what is...

5 & 7
5. Problem 9.11 (Valuation of a Constant Growth
Stock)
A stock is expected to pay a dividend of $1.00 at the end of the
year (i.e., D1 = $1.00), and it should continue to grow
at a constant rate of 6% a year. If its required return is 15%,
what is the stock's expected price 1 year from today? Do not round
intermediate calculations. Round your answer to the nearest
cent.
$
7. Problem 9.14 (Nonconstant Growth)
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Tesla does not pay any dividends because it is expanding rapidly
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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 9% per year. If the
required return on the stock is...

Nonconstant growth
Computech Corporation is expanding rapidly and currently needs
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However, investors expect Computech to begin paying dividends,
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