Question 1 You own the stock of SageTech and its current price is $55.00/share.
ID: 2729876 • Letter: Q
Question
Question 1
You own the stock of SageTech and its current price is $55.00/share. It pays no dividend today. Based on your own research, you expect SageTech to pay its first dividend of $3.80/share at the end of Years 1 and 2 (12 and 24 months from now). Given its performance outlook, you further expect the Board of SageTech to increase the Year 3 dividend by 10% to $4.18; and then to increase it by 3% annually for the next 5 years (end of years 4 through 8); after which it will grow by 1.5% annually forever.
You enjoy a number of investment alternatives that will, on average, provide you with a 9.0% annual return. In light of this, should you buy more SageTech stock at the current $55 price; or should you sell all your current SageTech holdings and reinvest the proceeds elsewhere?
Explanation / Answer
Solution :-
There are many ways to solve this problem, let take a very Simple way through Present Value
Let us calculate the present value of all Dividends @9%
Now based upon below working current Present valus is $48.78 while Current market prie is $55,
Answer :- we shold sell SageTech holdings and reinvest the proceeds elsewhere
Year
Dividend
PVF at 9%
Present Value
Remarks
(A)
(B)
(A * B )
1
3.80
0.917
3.49
2
3.80
0.842
3.20
3
4.18
0.772
3.23
10% increase
4
4.31
0.708
3.05
3% increase
5
4.43
0.650
2.88
3% increase
6
4.57
0.596
2.72
3% increase
7
4.70
0.547
2.57
3% increase
8
4.85
0.502
2.43
3% increase
9
54.75
0.460
25.21
Perpectual Cashflow formula = Dividend / (9% - 1.5%)
Total
48.78
Year
Dividend
PVF at 9%
Present Value
Remarks
(A)
(B)
(A * B )
1
3.80
0.917
3.49
2
3.80
0.842
3.20
3
4.18
0.772
3.23
10% increase
4
4.31
0.708
3.05
3% increase
5
4.43
0.650
2.88
3% increase
6
4.57
0.596
2.72
3% increase
7
4.70
0.547
2.57
3% increase
8
4.85
0.502
2.43
3% increase
9
54.75
0.460
25.21
Perpectual Cashflow formula = Dividend / (9% - 1.5%)
Total
48.78
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