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?
$\begin{array}{lccccccc}
\text { Year } & 0 & 1 & 2 & 3 & 4 & 5 & 6 \
\hline \text { Growth rate } & \text { NA } & \text { NA } & \text { NA } & \text { NA } & 50.00 \% & 25.00 \% & 8.00 \% \
\text { Dividends } & \$ 0.000 & \$ 0.000 & \$ 0.000 & \$ 0.250 & \$ 0.375 & \$ 0.469 & \$ 0.506
\end{array}$
A) $9.94
B) $10.19
C) $10.45
D) $10.72
E) $10.99

Question

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?
 $\begin{array}{lccccccc}
\text { Year } & 0 & 1 & 2 & 3 & 4 & 5 & 6 \
\hline \text { Growth rate } & \text { NA } & \text { NA } & \text { NA } & \text { NA } & 50.00 \% & 25.00 \% & 8.00 \% \
\text { Dividends } & \$ 0.000 & \$ 0.000 & \$ 0.000 & \$ 0.250 & \$ 0.375 & \$ 0.469 & \$ 0.506
\end{array}$
A) $9.94
B) $10.19
C) $10.45
D) $10.72
E) $10.99

Quizplus · Accepted Answer

Required return = 11%
 $\begin{array} { l c c c c c c c c } 
\text { Year } & 0 & 1 & 2 & 3 & 4 & 5 & 6 \
\hline & & & & & 50.00 \% & 25.00 \% & 8.00 \% \
\text { Dividend } & \$ 0.000 & \$ 0.000 & \$ 0.000 & \$ 0.250 & \$ 0.375 & \$ 0.469 & \$ 0.506 \
\text { Harizan value } = P _ { 5 } = D _ { 6 } / \left( r _ { 5 } \right. & & & & & & & & \
- \text { g6 } ) = & & & & 16.875 & & & \
\hline \text { Total CFs } & & \$ 0.000 & \$ 0.000 & \$ 0.250 & \$ 0.375 & \$ 17.344 \
\text { PV of CFs } & & \$ 0.000 & \$ 0.000 & \$ 0.183 & \$ 0.247 & \$ 10.293
\end{array}$ 
Price = $10.72

Sawchuck Consulting Has Been Profitable for the Last 5 Years