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The firm presently pays no dividends. However, seven years from today, the company is expected to...

The firm presently pays no dividends. However, seven years from today, the company is expected to begin paying a dividend of $1.00 per share. This dividend is expected to increase by 20% for one year and then by 5% per year, thereafter. If based upon risk, this type of investment requires an expected annual return of 25%, at what price should Xenon sell, today?

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Answer #1

Price of Share = PV of Cash Flows from it.

COmputation of Dicidend:

P8 = D9 / ( Ke - g)

$ 1.26 / [ 25% - 5% ]

= $ 1.26 / 20%

= $ 6.30

Value of share = PV of cash flows from it.

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