Hi-Tek is a young start-up company that is currently retaining all of its earnings. The company plans to pay a $2 per share dividend in Year 7 and increase that dividend by 2.2 percent per year thereafter. What is the current share price if the required return is 16 percent?

Question

Hi-Tek is a young start-up company that is currently retaining all of its earnings. The company plans to pay a $2 per share dividend in Year 7 and  increase that dividend by 2.2 percent per year thereafter. What is the current share price if the required return is 16 percent?

Quizplus · Accepted Answer

The correct answer is A because the current share price is $5.95. This is calculated using the dividend discount model, which takes into account the present value of all future dividends. The required return is 16%, and the dividend in Year 7 is $2 per share. The dividend is expected to grow by 2.2% per year thereafter.

Hi-Tek Is a Young Start-Up Company That Is Currently Retaining