Nu-Tek is expanding rapidly. As a result, the company expects to pay annual dividends of $.62, .80, and $1.05 per share over the next three years, respectively. After that, the dividend is projected to increase by 4 percent annually. What is the current value of this stock if the required return is 16 percent?A. $7.63 B. $9.67 C. $10.46 D. $6.58 E. $8.49

Respuesta :

Answer:    

PHASE 1

K = 16% = 0.16

V1 = D1      +            D2       +      D3

       (1 + K)          (1 + K)2           (1 + K)3

V1 = $0.62    +       $0.80     +     $1.05

       (1 + 0. 16)         (1 + 0.16)2     (1 + 0.16)3

V1 =$0.62    +       $0.80    +     $1.05

       (1.16)              (1.16)2             (1 .16)3

V1 = $0.53     +       $0.59     +    $0.67      

V1 = $1.79                                                        

PHASE 2    

g = 4% = 0.04                                          

V2 = DN( 1 + g)

        (Ke –g)(1+ K)n

V2 = $1.05(1 + 0.04)

         (0.16 – 0.04)(1+ 0.16)3  

V2 = 1.092

        0.12 x 1.560896

V2 = 1.092

       0.18730752

V2 = $5.83

Current market price

= V1  + V2

= $1.79    + $5.83

V2 = $7.62

The correct answer is A

Explanation:

In this case, there is need to decompose the current market price into two phases. In the first phase, dividends were given. The market price for this phase (V1) is a function of dividend in year 1 divided by 1 + k plus dividend in year 2 divided by 1 +k raised to power 2 plus dividend in year 3 divided by 1 + k raised to power 3. K represents the required return on stock.

In the second phase, the market price for this phase (V2) is a function of dividend paid in year 3, subject to the new growth rate of 4%, divided by 1+k multiplied by K-g raised to power 3. The Current market price is the aggregate of V1 and V2.

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