New Gadgets is growing at a very fast pace.As a result,the company expects to pay annual dividends of $0.55,0.80,and $1.10 per share over the next three years,respectively.After that,the dividend is projected to increase by 5 percent annually.The last annual dividend the firm paid was $0.40 a share.What is the current value of this stock if the required return is 16 percent?

Question

Quizplus · Accepted Answer

P₃ = ($1.10 × 1.05)/(0.16 - 0.05) = $10.50; P₀ = [$0.55/1.16] + [$0.80/1.16²] + [($1.10 + $10.50)/1.16³] = $8.50

New Gadgets Is Growing at a Very Fast Pace