Energistics, Inc. plans to retain and reinvest all of its earnings for the next three years; at the end of year 3 the ﬁrm will pay a special dividend of $5 per share. Beginning in year 4, the ﬁrm will begin to
Pay a dividend of $1 per share, which is expected to grow at a 3% rate annually forever. Given a
Required return of 12%, the stock should sell for _____ today.

Question

Quizplus · Accepted Answer

The correct answer is A because the stock should sell for $11.47 today. This is calculated by using the dividend discount model, which takes into account the present value of all future dividends. The formula for the dividend discount model is:P = D / (r - g)where:P is the present value of the stockD is the annual dividendr is the required returng is the growth rate of the dividendIn this case, the annual dividend is $1, the required return is 12%, and the growth rate of the dividend is 3%. Plugging these values into the formula, we get:P = $1 / (0.12 - 0.03) = $11.47