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Okra, Inc. is a young start-up company. No dividends will be paid on the stock initially,...

Okra, Inc. is a young start-up company. No dividends will be paid on the stock initially, because the firm needs to plow back its earnings (i.e., not to pay out dividends) to fuel growth. Five years from today (t=5), Okra will pay its first annual dividend of $5 per share. Dividends will increase by 5% per year, thereafter. If the required rate of return on the Okra stock is 15%, what is the current share price of Okra? (Please pay attention to the timing.)

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Answer #1

Price at end of year 4 =D5./(rs-g)

                 = 5 /(.15-.05)

                 = 5 / .10

                = $ 50 per share

Current price = Price at end of year 4 *PVF15%,4

                     = 50 * .57175

                       = $ 28.59 per share

working:

Find present value factor(PVF15%,4) using the formula 1/(1+i)^n    where i= 15% and n= 4

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