Phoenix Industries has pulled off a miraculous recovery. Four years ago it was n
ID: 2726860 • Letter: P
Question
Phoenix Industries has pulled off a miraculous recovery. Four years ago it was near bankruptcy. Today, it announced a $1 per share dividend to be paid a year from now, the first dividend since the crisis. Analysts expect dividends to increase by $1 a year for another 2 years. After the third year (in which dividends are $3 per share) dividend growth is expected to settle down to a more moderate long-term growth rate of 6%. If the risk-free interest rate is 6%, the risk premium is 6%, and the stock's beta is 2.0. what must be its stock price?
Explanation / Answer
Dividend in year 1 = $1
Dividend in Year 2 = $2
Dividend in YEar 3 = $3
Cost of equity = 6% + (6*2) = 18%
Price at the end of 3 years = 3*(1.06) / .18-.06 = $26.50
Stock price today = 1/(1.18^1) + 2/(1.18^2) + 26.50/(1.18^3) = $18.41