Question

Blue Packaging Company (BPC) expects to pay a dividend of $1.28 in exactly one year. BPC has recently invested in multiple wealth increasing projects and expects its operating cash flow to increase dramatically for a few years. BPC expects a dividend growth rate of 50% during years 2, 3, and 4. After that high growth period, a normal growth rate of 3.1% will occur. BPC shareholders require a 14.7% return. The BPC stock price is closest to:

a. $29.14.

b. $31.82.

c. $33.91.

d. $45.46.

Answer 1

Year 2 Cash flows $1.28 $1.92 $2.88 $4.32 $38.40 pv @ 14.7% Present value 0.8718 $1.12 0.7601 $1.46 0.6627 $1.91 0.5778 $2.50 0.5778 $22.18 $29.14 price at year 4 (4.32*1.031)/(0.147-0.031) current value