Sawchuck Consulting has been profitable for the last 5 years,but it has never paid a dividend.Management has indicated that it plans to pay a $0.25 dividend 3 years from today,then to increase it at a relatively rapid rate for 2 years,and then to increase it at a constant rate of 8.00% thereafter.Management's forecast of the future dividend stream,along with the forecasted growth rates,is shown below.Assuming a required return of 11.00%,what is your estimate of the stock's current value? $\begin{array}{lccccccc}
\text { Year } & 0 & 1 & 2 & 3 & 4 & 5 & 6 \
\hline \text { Growth rate } & \text { NA } & \text { NA } & \text { NA } & \text { NA } & 50.00 \% & 25.00 \% & 8.00 \% \
\text { Dividends } & \$ 0.000 & \$ 0.000 & \$ 0.000 & \$ 0.250 & \$ 0.375 & \$ 0.469 & \$ 0.506
\end{array}$

Question

Quizplus · Accepted Answer

Required return = 11%
 $\begin{array}{lccccccc}
\text { Year } & 0 & 1 & 2 & 3 & 4 & 5 & 6 \
\hline & & & & & 50.00 \% & 25.00 \% & 8.00 \% \
\text { Dividend } & \$ 0.000 & \$ 0.000 & \$ 0.000 & \$ 0.250 & \$ 0.375 & & \$ 0.506 \
\text { Terminal value }=\mathrm{P}_{5}=\mathrm{D}_{6} /\left(\mathrm{r}_{\mathrm{s}}-\mathrm{g}_{6}\right)= & & & & && \$ 0.469 & \
& & & & & & \
& & & & & &16.875 & \
\hline \text { Total CFs } & & \$ 0.000 & \$ 0.000 & \$ 0.250 & \$ 0.375 & \$ 17.344 & \
\text { PV of CFs } & &\$ 0.000 & \$ 0.000 & \$ 0.183 & \$ 0.247 & \$ 10.293 &
\end{array}$ Price = $10.72

Sawchuck Consulting Has Been Profitable for the Last 5 Years,but