The dividend for Should I, Inc., is currently $1.70 per share. It is expected to grow...

The dividend for Should I, Inc., is currently $1.70 per share. It is expected to grow at 12 percent next year and then decline linearly to a 3 percent perpetual rate in four years. If you require a 16 percent return on the stock, what is the most you would pay per share?

Price per share: $_______

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Expert Solution

year	Dividend	PVF16%	Dividend *PVF
1	1.7(1+.12)= 1.904	.86207	1.6414
2	1.904(1+.09)= 2.0754	.74316	1.5424
3	2.0754(1+.06)=2.1999	.64066	1.4094
3	17.43	.64066	11.1667

Current stock price			15.76

**The growth rate will fall by 3% every year so trend will be (12%,9%,6% )

Terminal value at year 3 = D3(1+g)/(rs-g)

= 2.1999(1+.03)/(.16-.03)

= 2.2659 /.13

= 17.43

**PVF can be find from table at 16% or using the formula 1/(1+i)^n

jeff jeffy answered 1 year ago

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