Simtek currently pays a $2.50 dividend (D 0 ) per share. Next year’s dividend is

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 a9percentannualratefor3yearsanda6percentannualratethereafter. a. What is the current value of a share of Simtek stock to an investor who requires a15percentreturnonhisorherinvestment? b. If the dividend in year 1 is expected to be $3 and the growth rate over the fol- lowing 3 years is expected to be only 7 percent and then 6 percent thereafter, what will the new stock price be?

Explanation / Answer

Simtek All Amounts in $ a.Current Value of Dividend, based on increasing trends Year Dividend 0 2.5 1 3 2 3.27 3 3.5643 4 3.885087 5 4.118192 Based on an expected return on 15% on the stock, the current value of a share of Simtek stock will be 27.45 $ b. Current Value of Dividend, based on increasing trends Year Dividend 0 2.5 1 3 2 3.21 3 3.4347 4 3.675129 5 3.895637 Based on an expected return on 15% on the stock, the current value of a share of Simtek stock will be 25.97 $

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