Please give correct answers Staton-smith Software is a new start-up company and

Question

Please give correct answers

Staton-smith Software is a new start-up company and will not pay dividends for the first five years of operation. It will then in dividend policy of 3.75 with a constant growth rate of 3% with the first divided at the end of year six. The company will be in to year total. What is the stock's price if an investor wants at 11% return? a 13% return? a 22% return? a 35 % return? What is the stock's price if an investor wants a 11% return? (Round to the nearest cent.) What is the stock's price if an investor wants a 35 % return? (Round to the nearest cent.)

Explanation / Answer

price of stock = summation (D*(1+g)^n-1)/((1+k)^n) g= dividend growth rate, k=required rate of return, D= amount of dividend- thid id the exact formula but if n is large such as 50, it can be approx as, in this case n=20, as first five years no dividend is paid

price of stock = (D*(1+g))/(k-g)

a) P = 3.75*(1+0.03)/(0.11-0.03) = $48.2

b) P = 3.75*(1+0.03)/(0.13-0.03) = $38.6

c) P = 3.75*(1+0.03)/(0.22-0.03) = $20.32

d) P =3.75*(1+0.03)/(0.35-0.03) = $12.07

Related Questions

Navigate

• Browse (All)
• Browse P
• Subjects

---