Nu-Tech is expecting a period of intense growth and has decided to reduce its annual dividend by 10 percent a year for the next two years.After that,it will maintain a constant dividend of $.70 a share.The company just paid $1.80 per share.What is the value of this stock if the required rate of return is 13 percent?
A)$6.99
B)$6.79
C)$8.22
D)$8.87
E)$7.62

Question

Quizplus · Accepted Answer

To find the value of the stock, we need to first calculate the future dividends during the two-year period of reduced dividends:
Year 1: Dividend = $1.80 x (1 - 0.10) = $1.62
Year 2: Dividend = $1.62 x (1 - 0.10) = $1.46

After year 2, the company will maintain a constant dividend of $0.70 per share.

Now, we can calculate the present value of all expected future dividends using the dividend discount model:

PV = D1/(1+r) + D2/(1+r)^2 + ... + Dn/(1+r)^n

PV = $1.62/(1+0.13) + $1.46/(1+0.13)^2 + [$0.70/(0.13 - 0.10)]/(1+0.13)^2
PV = $1.429 + $1.197 + $4.166
PV = $6.792

Therefore, the value of this stock is $6.79, which is closest to option B.

Nu-Tech Is Expecting a Period of Intense Growth and Has