Microhard inc has decided to suspend its dividend for next three years. It plans

Question

Microhard inc has decided to suspend its dividend for next three years. It plans on resuming dividends 4 years from now when it will pay a $3 per share dividend. This level of dividends will be maintained for one additional year. Thereafter, Microhard inc is expected to increase its cash dividend payment at an annual growth rate of four percent in perpetuity. The required rate of return on Microhard's stock is 14%. According to the discounted dividend model, at what price should Microhard's stock now sell?

Explanation / Answer

price = 3/1.14^4 + 3/1.14^5 + 3.12/(0.14-0.04)

=34.53

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