Urgent You want to value the stock of Tech Apps, Inc. The company has never paid...

Urgent

You want to value the stock of Tech Apps, Inc. The company has never paid a dividend before and is planning to ramp up its dividends over the next few years. The first dividend, to be paid one year from today, will be $1.25. The next four dividends will each be $0.50 higher than the preceding dividend (i.e., $1.75 in year 2, $2.25 in year 3, etc, up to year 5). After that, the company expects to maintain a 50% payout ratio (POR) going forward (forever) while its ROE stays constant at 10%. Assume that the appropriate expected return for Tech Apps' stock is 8%.

a. What is the expected dividend growth rate after year 5?

b. What is the value of a Tech Apps share today?

c. Would you expect the value of the company's shares to rise or fall if it increased its payout ratio (POR), assuming it can maintain the same ROE? Why? (You do not need to calculate anything for this part if you can explain the direction of the change logically).

Expert Solution

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jeff jeffy answered 1 year ago

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