Starskeep, Inc., is a fast growing technology company. The firm projects a rapid

Question

Starskeep, Inc., is a fast growing technology company. The firm projects a rapid growth of 40 percent for the next two years and then a growth rate of 20 percent for the following two years. After that, the firm expects a constant-growth rate of 8 percent. The firm expects to pay its first dividend of $1.25 a year from now. If your required rate of return on such stocks is 20 percent, what is the current price of the stock?

a.$15.63

b.$30.30

c.$4.70

d.$22.68

Please show work. Is there a way to solve this on a financial calculator?

Explanation / Answer

Hi,

Please find the detailed answer as follows:

D1 = 1.25

D2 = 1.25*(1+.40)

D3 = 1.25*(1+.40)*(1+.20)

D4 = 1.25*(1+.40)*(1+.20)^2

P4 = 1.25*(1+.40)*(1+.20)^2*(1+.08)/(.20 - .08)

Current Stock Price = 1.25/(1+.20)^1 + 1.25*(1+.40)/(1+.20)^2 + 1.25*(1+.40)*(1+.20)/(1+.20)^3 + 1.25*(1+.40)*(1+.20)^2/(1+.20)^4 + 1.25*(1+.40)*(1+.20)^2*(1+.08)/(.20 - .08)*(1+.20)^4 = 15.625 or 15.63

Option A (15.63) is the correct answer.

Thanks.

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