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Bridgeport Supplies Ltd. currently doesn’t pay any dividends but is expected to start paying dividends in...

Bridgeport Supplies Ltd. currently doesn’t pay any dividends but is expected to start paying dividends in five years. The first dividend is expected to be $1 and is expected to grow at 4.5 percent thereafter. The required rate of return for the firm is 9 percent. What is Bridgeport’s current stock price? (Round intermediate calculations to 3 decimal places, e.g. 20.417 and the final answer to 2 decimal places, e.g. 15.61.)

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Answer #1

Value after year 5=(D5*Growth rate)/(Required return-Growth rate)

=(1*1.045)/(0.09-0.045)

=23.222(Approx)

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

=1/1.09^5+23.222/1.09^5

=$15.74(Approx).

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