Puma Technologies' shares are currently traded in the NYSE. Analysts following the company forecast the dividends...

Puma Technologies' shares are currently traded in the NYSE. Analysts following the company forecast the dividends next year as follows: + Scenario 1: with probability 0.4, dividends in year 1 is expected to be $0.5 per share. + Scenario 2: with probability 0.6, dividends in year 1 is expected to be $0.1 per share. With this forecast, the dividends are expected to grow at a rate of 10% for year 2 and stabilize at a constant growth rate of 4% thereafter (i.e., year 3 moving forward). With your understanding of the company, you require a discount rate of 15% for all of the future cash flows. NOTE: Round up the answers to two decimal points. Provide all of your derivation steps and formulas in each part.

a. (1 pts) Taking into account the probability in each scenario, calculate the expected dividends in year 1.

b. (2 pts) Calculate the expected dividends in year 2 and year 3.

c. (2 pts) Calculate the expected share price in year 2.

d. (2 pts) How much would you be willing to pay for a share of Puma Technologies today in year 0?

Expert Solution

Answer 1

	Dividends	Probability	Multiply of both
Scenario 1	0.5	0.40	0.20000
Scenario 2	0.1	0.60	0.06000
Expected dividends in year 1			0.26000

Answer 2

*Expected dividends in year 2 (0.26(1+10%))**			0.28600
*Expected dividends in year 3 (0.286(1+4%))**			0.29744

Answer 3

Expected dividends in year 3			0.29744
Dividend: Discount rate - Growth rate (15%-4%)			11%
Expected share price in year 2			2.704

Answer 4

	Cash flows	PV factor @ 15%	Present value
Dividend in Year 1	0.26000	0.86957	0.23
Dividend in Year 2	0.28600	0.75614	0.22
Share price in year 2	2.70400	0.75614	2.04
Share of Puma Technologies today in year 0			$ 2.49

Year	PV factor @ 15%	Remarks
1	0.86957	= 1 / 1.15
2	0.75614	= 0.86957 / 1.15

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