*Please answer question below thoroughly and show all work* You want to invest i

Question

*Please answer question below thoroughly and show all work*

You want to invest in Micro Soft Company. The Micro Soft currently is paying no dividend because of depressed earnings. A recent change in management promises, however, a brighter future. Investors expect Micro Soft to pay a dividend of $1 next year (the end of the year). This dividend is expected to increase to $2 the following year and to grow at a rate of 10 percent per annum for the following two years (years 3 and 4). A good new investor, expects the price of the stock to increase 50 percent in value between now (time zero) and the end of year 3.

If the investor plans to hold the stock for two years and requires a rate of return of 20 percent on the investor, what value would he place on the stock today?

Explanation / Answer

years dividend

1 1 Cashflows year1 24.20*1.5 = 36.3 *.833=30.24

2 2 year 2 36.3*.944=34.27

3 2*1.1=2.2 value he should place today = 30.24+34.27 =64.51

4 2.2*1.1=2.42, 2.42/.20-.10 = stock price =24.20,   

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