Phoenix Industries has pulled off a miraculous recovery. Four years ago it was n
ID: 2785607 • 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 firm’s investors expect to earn a return of 14% on this stock, what must be its price?(Do not round intermediate calculations. Round your answer to 2 decimal places.)
Current price?
Explanation / Answer
Dividend1:1
Dividend2:1+1=2
Dividend3:2+1=3
Dividend4:3*1.06=3.18
Dividend5:3.18*1.06=3.3708
so on
Current Price=D1/1.14+D2/1.14^2+D3/1.14^3+Horizon Value/1.14^3
=1/1.14+2/1.14^2+3/1.14^3+Horizon Value/1.14^3
Horizon value=3.18/(0.14-0.06)=39.75
So, Current Price=1/1.14+2/1.14^2+3/1.14^3+39.75/1.14^3=$31.27