Netscrape Communications does not currently pay a dividend. You expect the compa

Question

Netscrape Communications does not currently pay a dividend. You expect the company to begin paying a $4 per share dividend in 14 years, and you expect dividends to grow perpetually at 5 percent per year thereafter. If the discount rate is 13 percent, how much is the stock currently worth? (Do not round intermediate calculations. Round your answer to 2 decimal places. Omit the "$" sign in your response.)

Netscrape Communications does not currently pay a dividend. You expect the company to begin paying a $4 per share dividend in 14 years, and you expect dividends to grow perpetually at 5 percent per year thereafter. If the discount rate is 13 percent, how much is the stock currently worth? (Do not round intermediate calculations. Round your answer to 2 decimal places. Omit the "$" sign in your response.)

Explanation / Answer

Stock Price in 13 Years = Expected Dividend in Year 14/(Discount Rate - growth rate)

Stock Price in 13 Years = 4/(13%-5%)

Stock Price in 13 Years = $ 50

Stock currently worth = Stock Price in 13 Years/(1+discount rate)^13

Stock currently worth = 50/1.13^13

Stock currently worth = $ 10.21

Answer

Stock Currently worth = $ 10.21

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