The Know-It-All Co. is a new firm in a rapidly growing industry. The company is

Question

The Know-It-All Co. is a new firm in a rapidly growing industry. The company is planning on increasing its annual dividend by 20% a year for the next four years and then decreasing the growth rate to 5% per year. The company just paid its annual dividend in the amount of $1.00 per share. What will be the price of one share in year 4 if the required rate of return is 9.25%? The Know-It-All Co. is a new firm in a rapidly growing industry. The company is planning on increasing its annual dividend by 20% a year for the next four years and then decreasing the growth rate to 5% per year. The company just paid its annual dividend in the amount of $1.00 per share. What will be the price of one share in year 4 if the required rate of return is 9.25%?

Explanation / Answer

solution

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P4=2.0736*(1+.05)/.925-.05

P4=51.2301

P0=1.20/(1.0925)1+1.44/(1.0925)2+1.728/(1.0925)3+2.0736/(1.0925)4+51.2301/(1.0925)5

P0 = 41.05

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