ZORG Industries, Inc., is a young start-up company. It will pay no dividends on

Question

ZORG Industries, Inc., is a young start-up company. It will pay no dividends on the stock over the next nine years because the it needs to plow back its earnings to fuel growth. The ZORG will pay a $15 per share dividend in 10 years and will increase the dividend by 5 percent per year thereafter. If the required return on this stock is 15 percent, what is the current share price?

ZORG Industries, Inc., is a young start-up company. It will pay no dividends on the stock over the next nine years because the it needs to plow back its earnings to fuel growth. The ZORG will pay a $15 per share dividend in 10 years and will increase the dividend by 5 percent per year thereafter. If the required return on this stock is 15 percent, what is the current share price?

Explanation / Answer

current share price= 15/1.15^10+[(15x1.05)/(.15-.05)1.15^10]

= 3.7078+38.93

= $42.64

Explanation,

15/1.15^10= $3.7078

[(15x1.05)/(.15-.05)1.15^10]= 38.93

Therefore current share price= $42.64

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