Steel Safety Corporation is in the introductory stage of the industry life cycle

Question

Steel Safety Corporation is in the introductory stage of the industry life cycle, so its sales and earnings have grown rapidly in recent years. To date, the company has chosen to retain all of its earnings rather pay dividends. Analysts have projected that Steel Safety will continue to retain all of its earnings for another 10 years. Eleven years from today, the company is expected to pay its first dividend, which is predicted to be $25 per share. Analysts have also determined that the appropriate required rate of return on Steel Safety's stock is 16%.

a. Compute the value of the stock today, assuming that ince the dividend payments start, the dollar amount will remain constant at $25 per share per year. (Hint: The first dividend is not paid until 11 years from today.)

b. Assuming the dividend will grow at a constant rate of 5 percent per year once the payments begin, what is the value of the stock today?

[The answer should be: a.) $35.42 b.) $54.09 -- I just need to understand the proper steps to solve it]

Explanation / Answer

a. value of the stock today = present value of dividends =( D/r)/(1+r)^t = (25/16%)/(1+16%)^10= $35.42

b.  value of the stock today = present value of dividends =( D*(1+g)/(r-g))/(1+r)^t = (25*1.05/(16%-5%))/(1+16%)^10= 54.09

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