Sawchuck Consulting has been profitable for the last 5 years, but it has never p
ID: 2615311 • Letter: S
Question
Sawchuck Consulting has been profitable for the last 5 years, but it has never paid a dividend. Management has indicated that it plans to pay a $0.25 dividend 3 years from today, then to increase it at a relatively rapid rate for 2 years, and then to increase it at a constant rate of 8.00% thereafter. Management's forecast of the future dividend stream, along with the forecasted growth rates, is shown below. Assuming a required return of 11.00%, what is your estimate of the stock's current value?
Use the rounded values of dividends (as given in the table above) for your subsequent calculations.
Select the correct answer.
Year 0 1 2 3 4 5 6 7 Growth rate NA NA NA NA 25% 12.5% 8.00% 8.00% Dividends $0.000 $0.000 $0.000 $0.25 $0.31 $0.35 $0.38 $0.41Explanation / Answer
d. $8.11 ,
year 3
0.38
Dividend 7 / (required rate - growth rate at 7 year)
=$0.41 / (11%-8%)
=13.667
0.25 * 0.7312
=0.183
0.31*0.6587
=0.204
0.35 * 0.5935
=0.208
14.047 * 0.5346
=7.510
estimated stock's current value = 0.183 + 0.204 + 0.208 + 7.510
= $8.11
year 1 year 2year 3
year 4 year 5 year 6 year 7 Dividend 0 0 0.25 0.31 0.350.38
Terimal value of year 6Dividend 7 / (required rate - growth rate at 7 year)
=$0.41 / (11%-8%)
=13.667
Total cash flow 0 0 0.25 0.31 0.35 14.047 Present value of cash flow 0 00.25 * 0.7312
=0.183
0.31*0.6587
=0.204
0.35 * 0.5935
=0.208
14.047 * 0.5346
=7.510