Phoenix Industries has pulled off a miraculous recovery. Four years ago it was n
ID: 2730116 • Letter: P
Question
Phoenix Industries has pulled off a miraculous recovery. Four years ago it was near bankruptcy. Today, it announced a $3 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 $5 per share) dividend growth is expected to settle down to a more moderate long-term growth rate of 5%. If the firm’s investors expect to earn a return of 15% on this stock, what must be its price? (Do not round intermediate calculations. Round your answer to 2 decimal places.)Current price $
Explanation / Answer
Answer:
DIV1= $3
DIV2= $4
DIV3= $5
g= 0.05
P3= ($5 * 1.05)/(0.15 – 0.05) = $52.50
P0=$3/1.15+$4/(1.15)^2+(5+52.50)/(1.15)^3
=2.608+3.0245+37.807
=43.44