Question

DataTech is a high growth company, however it generates cash flow above its operating needs. As such, it has started to pay a dividend in its current year. The current dividend is $1.50 per share. It expects strong cash flow in the coming years and plans to increase dividends at the rate of 25% annually for the next four years, 15% for the following two years and then it will increase the dividend at a constant rate of 5.0% thereafter. Investors have a required rate of return on DataTech stock of 14%. ANSWER THE 3 QUESTIONS BELOW. 1) What is its current stock price using the dividend discount model? 2) What if Data Tech only expects to increase dividends at 5% in perpetuity starting the next year? 3) What if Data Tech plans to pay the current dividend into perpetuity with no future growth?

Answer 1

Ans: } Colaulation of Dividend in the Coming yeon. T-o (today) a $1.50 - 1.895 7.2 2.343 7.3 2.929 3.662 4.5 4.2114 Y-6 4.843 Y-7 5.085 S thereafter 44 in perpetuity

Discount Rete - 14% rrent Stock Value 1.875 + 2.343 + 2.929 + 3.662 (1404) + 0.142 +0.14)3 (+0.14)" ti5.085 24-0.05) (1+0.4) 6 +4. 2114 + 4.843. (1+0.14) (1+0.14) Terminal vale" (1,895 x0.8721) + (2.34370.769) + (2.929% 0.6794) +(3.662 x 0.5920) + (4.2.114 x 0S1q) + (4.843 x 0.455) - + (0.455 x 56.5) os $37.6851 Capprox 2. Dividend grow @ Slin perpetuity, Price of stock as Di kerg 1.575 014-0.05 D, Next year Divided Ke Discount Rete go growth Reh $19.5 3.) If No fotore growth. Price of stock ie. g=0 6 Next year Divided 1. 50 O.ly $ 10,7