The last dividend paid by New Technologies was an annual dividend of $1.40 a share. Dividends...

The last dividend paid by New Technologies was an annual dividend of $1.40 a share. Dividends for the next 3 years will be increased at an annual rate of 8 percent. After that, dividends are expected to increase by 3 percent each year. The discount rate is 16 percent. What is the current value of this stock?

Expert Solution

D1=(1.4*1.08)=1.512

D2=(1.512*1.08)=1.63296

D3=(1.63296*1.08)=1.7635968

Value after year 3=(D3*Growth rate)/(Discount rate-Growth rate)

=(1.7635968*1.03)/(0.16-0.03)

=13.9731131

Hence current value=Future dividend and value*Present value of discounting factor(rate%,time period)

=1.512/1.16+1.63296/1.16^2+1.7635968/1.16^3+13.9731131/1.16^3

=$12.6(Approx)

jeff jeffy answered 2 years ago

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