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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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