Question

Please solve clearly and explain all steps

Nanofied Food Inc. just issued stock and the price is fluctuating wildly The company prospectus indicated that it would not pay out any dividend for the first 10 years, but planned on issuing its first annual dividend in year eleven in the amount of 51.25. The expectation is that the company will be on a regular growth trend of 6 from year eleven on. If you have a required return of 10.25%, what is the price point you would look for to buy into Nanofied Foods now? Buy at $11.08 or lower Buy at $21.80 or lower Buy at $121.79 or lower Buy at 14.71 or lower Buy at 515 or lower

Answer 1

Price = Dividend in 1 year/(cost of equity - growth rate)

Price = 1.25/ (0.1025 - 0.06)

Price = 29.41

Future value = present value*(1+ rate)^time

29.41 = Present value*(1+0.1025)^10

Present value = 11.08

Buy at $11.0 or lower