Nu Electronics is expecting a period of intense growth. Thus, the company has decided to retain more of its earnings to help ﬁnance the growth. As a result, the company is going to reduce the
Annual dividend by 25% a year for the next 2 years. After that, it will maintain a constant dividend of
$)50 a share. Last year, the company paid $2 per share. What is the market value of this stock if the
Required rate of return is 14%?

Question

Quizplus · Accepted Answer

The market value of the stock can be calculated using the dividend discount model. The dividends for the next two years are $1.50 and $1.125, respectively, due to the 25% reduction. After that, the dividend is constant at $50. The present value of these dividends, discounted at the required rate of return of 14%, gives the market value of the stock.

Nu Electronics Is Expecting a Period of Intense Growth