SmartDeal Inc. has just paid dividend of $5. The dividend is expected to increase at 16%...

SmartDeal Inc. has just paid dividend of $5. The dividend is expected to increase at 16% for the first 15 years, -6% for the next 10 years and then 2% forever. The required rate of return is 12% for the first 8 years and 20% thereafter. Find its share price today. (Please show your work, and do NOT use Excel to solve)

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Expert Solution

Share price today will be the discounted value of all dividends paid in future. Here D0 = $5, g1 = 16%, g2 = -6% and g3 = 2%.

r1 = 12% and r2 = 20%

Thus dividends in future (using the above mentioned growth rates) will be:

Year	Dividend
0	5.00
1	5.80
2	6.73
3	7.80
4	9.05
5	10.50
6	12.18
7	14.13
8	16.39
9	19.01
10	22.06
11	25.59
12	29.68
13	34.43
14	39.94
15	46.33
16	43.55
17	40.94
18	38.48
19	36.17
20	34.00
21	31.96
22	30.04
23	28.24
24	26.55
25	24.95
26	25.45

Now price at the end of 25th year = D26/r-g. In the 26th year r = 20% and g = 2%. Thus P25 = 25.45/(20%-2%) = $141.40

Thus price today = D1/(1.12) + D2/1.12^2....+D8/1.12^8 + D9/1.20^9 + ........D25/1.20^25 + P25/1.20^25

= 5.80/1.12 + 6.73/1.12^2 + ....16.39/1.12^8+19.01/1.20^8+......24.95/1.20^25 + 141.40/1.20^25

= $81.76

jeff jeffy answered 7 months ago

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