Simtek currently pays a $2.50 dividend (D 0 ) per share. Next year’s dividend is
ID: 2650964 • Letter: S
Question
Simtek currently pays a $2.50 dividend (D 0 ) per share. Next year’s dividend is expected to be $3 per share. After next year, dividends are expected to increase at a 9 percent annual rate for 3 years and a 6 percent annual rate thereafter.
a. What is the current value of a share of Simtek stock to an investor who requires a15 percent return on his or her investment?
.
b. If the dividend in year 1 is expected to be $3 and the growth rate over the following 3 years is expected to be only 7 percent and then 6 percent thereafter, what will the new stock price be?
Explanation / Answer
Answer
Current value of share (P0) = Dividend for next year (D1) / [cost of capital (ke)