Logo
Home Study Material Contact Search
AI Chat FREE
  1. business
  2. finance
  3. smartdeal inc. has just paid dividend of $5. the d

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

Free

70.2K

Verified Solution

Question

Finance

SmartDeal Inc. hasjust paid dividend of $5. The dividend is expected to increase at16% 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 yearsand 20% thereafter. Find its share price today. (Please show yourwork, and do NOT use Excel to solve)

Answer & Explanation Solved by verified expert
4.1 Ratings (470 Votes)

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
Get Answers to Unlimited Questions

Join us to gain access to millions of questions and expert answers. Enjoy exclusive benefits tailored just for you!

Membership Benefits:
  • Unlimited Question Access with detailed Answers
  • Zin AI - 3 Million Words
  • 10 Dall-E 3 Images
  • 20 Plot Generations
  • Conversation with Dialogue Memory
  • No Ads, Ever!
  • Access to Our Best AI Platform: Flex AI - Your personal assistant for all your inquiries!
Become a Member

Transcribed Image Text

SmartDeal Inc. hasjust paid dividend of $5. The dividend is expected to increase at16% 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 yearsand 20% thereafter. Find its share price today. (Please show yourwork, and do NOT use Excel to solve)

Other questions asked by students

Psychology
1.2K views

choose a social problem and discuss it in the context of stephen pfohl's 5 components of...

Psychology
1.2K views

Psychology 150 Divorce Discussion This is a big one - and very hard for a lot of...

Mechanical Engineering
1.2K views

bending moment of 4 kN m is found to cause elastic failure of a solid circular...

Basic Math
1.2K views

Fill in each blank with the appropriate response. (Remember that the vertical stretch or shrink...

Basic Math
1.2K views

At a homeowners' association meeting, a board member can vote yes, vote no, or abstain...

Statistics
1.2K views

Which of the following is not a measure of center O median O coefficient of...

Accounting
1.2K views

Gerhan Company's flexible budget for the units manufactured in May shows $15,640 of...

Accounting
1.2K views

Fully Diluted Shares Outstanding Analysts use fully diluted shares outstanding when calculating equity value. Therefore,...

Accounting
1.2K views

The assets of Star Company are $ 200 comma 000 and the total liabilities are...

Accounting
1.2K views

The following standards for variable manufacturing overhead have been established for a company that makes...

Accounting
1.2K views

Cissi Jean Oliver opened Cleaning Angels, Inc. on September 4, 2018. During September, the following...

Finance
1.2K views

a. Draw the payoff diagram for a short position in a put option with a...