12. Phoenix Industries has pulled off a miraculous recovery. Four years ago it w

Question

12. Phoenix Industries has pulled off a miraculous recovery. Four years ago it was near bankruptcy. Today, it announced a $1 per share dividend to be paid a year from now, the first dividend since the crisis. Analysts expect dividends to increase by 50 percent a year for another 2 years. Then they expect dividends to increase by 20 percent a year for another 2 years. After the fifth year, dividend growth is expected to settle down to a more moderate long-term growth rate of 6 percent. If the firm’s investors expect to earn a return of 14 percent on this stock, what must be its price? Please show your work.

Explanation / Answer

Dividend Per Share (D1) $1 Dividend Per Share (D2): 1*(1+0.50) $1.50 Dividend Per Share (D3) : 1.50*(1+0.50) $2.25 Dividend Per Share (D4) : 2.25*(1+0.20) $2.70 Dividend Per Share (D5) : 2.70*(1+0.20) $3.24 Dividend Per Share (D6) : 3.24*(1+0.0.06) $3.43 Price Per Share (P5): D6/(Ke-g): 3.43/(0.14-0.06) 42.93 Price Per Share(P0) : D1*(PVIF 14%,1 Year) + D2*(PVIF 14%,2 Years) + D3*(PVIF 14%,3 Years) + D4*(PVIF 14%,4 Years) + D5*(PVIF 14%,5Years) + P5*(PVIF 14%,5 Years) $29.13 Year Cash Flows PV Factor @ 14% PV of Cash Flows 1 $1 0.87719 $0.88 2 $1.50 0.76947 $1.15 3 $2.25 0.67497 $1.52 4 $2.70 0.59208 $1.60 5 $3.24 0.51937 $1.68 5 $42.93 0.51937 $22.30 Total $29.13

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