Question

201920- Connect- C N Connect - Clase FIN 210 Cet Horwork with Cho y Help Save & Exit Phoenix Industries has pulled off a miraculous recovery. Four years ago it was near bankruptcy. Today, it announced a $3 per share dividend to be paid a year from now, the first dividend since the crisis. Analysts expect dividends to increase by $1 a year for another 2 years. After the third year (in which dividends are $5 per share, dividend growth is expected to settle down to a more moderate long- term growth rate of 5%. If the firm's investors expect to earn a return of 15% on this stock, what must be its price? (Do not round intermediate calculations. Round your answer to 2 decimal places.) Current price < Prev 20 of 41 18 Next > MacBook Air

Answer 1

Dividend in Year 1 (D1) = $ 3

Dividend in Year 2 (D2) = $ 4

Dividend in Year 3 (D3) = $ 5

Rate of return (Ke) = 15%

Expected Growth Rate (g) = 5% after D3

Price of a Share in case of Constant growth Rate, i.e., at the end of 3rd year

Pn = Dn (1+g) / (Ke - g)

D3 = $ 5

P3 = D3 (1+g) / (Ke - g)

P3 = $5 (1+0.05) / (0.15 - 0.05)

P3 = ($5 * 1.05) / 0.10

P3 = $5.25 / 0.10

P3 = $52.5

Current Price = PV of (D1,D2,D3) + PV of value of Share at the end of Y3

Particulars	Amount	PVF @ 15%	PV
D1	$       3.00	0.8696	$       2.61
D2	$       4.00	0.7561	$       3.02
D3	$       5.00	0.6575	$       3.29
P3	$    52.50	0.6575	$    34.52
	Current Price		$    43.44