A firm does not pay a dividend. It is expected to pay its first dividend of...

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A firm does not pay a dividend. It is expected to pay its first dividend of...

A firm does not pay a dividend. It is expected to pay its first dividend of $0.57 per share in two years. This dividend will grow at 8 percent indefinitely. Use a 9.5 percent discount rate.

Compute the value of this stock

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Answer 1

Answer #1

Value after year 2=(D2*Growth rate)/(Discount rate-Growth rate)

=(0.57*1.08)/(0.095-0.08)

=41.04

Hence value of stock=Future dividend and value*Present value of discounting factor(rate%,time period)

=0.57/1.095^2+41.04/1.095^2

=$34.70(Approx).

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Answer 2

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