Assume that it is now January 1, 2017 Wayne Martin Electric Inc. WME has ust dev
ID: 2787317 • Letter: A
Question
Assume that it is now January 1, 2017 Wayne Martin Electric Inc. WME has ust developed a solar panel capable of generating 200% more electricity than any other solar panel currently on the market. As a result, WME is expected to experience a 14% annual growth rate for the next 5 years. Other firms will have developed comparable technology at the end of 5 years, and WME's growth rate will slow to 6% per year indefinitely. Stockholders require a return of 13% on WME's stock. The most recent annual dividend Do which was paid yesterday was $1.73 per share. a. Calculate WME's expected dividends for 2017, 2018, 2019, 2020 and 2021. Round your answers to the nearest cent. Do not round your intermediate calculations. D2017-1.97 D2018-$. 2.25 D2019 = $ 2.56 D2020 = $ 2.92 D2021-$ 3.33 b. Calculate the value of the stock today, Po. Proceed by finding the present value of the dividends expected at the end of 2017, 2018, 2019, 2020 and 2021 plus the present value of the stock price that should exist at the end of 2021. The year-end 2021 stock price can be found by using the constant growth equation. Notice that to find the December 31, 2021, price, you must use the dividend expected in 2022, which is 6% greater than the 2021 dividend Round your answer to the nearest cent. Do not round your intermediate calculations.Explanation / Answer
D2016 = 1.73
D2017 = 1.73*(1+0.14) = 1.97
D2018 = 1.97*(1+0.14) = 2.25
D2019 = 2.25*(1+0.14) = 2.56
D2020 = 2.56*(1+0.14) = 2.92
D2021 = 2.92*(1+0.14) = 3.33
D2022 = 3.33*(1+0.06) = 3.53
According to dividend-discount model,
P0 = D1/(R-G)
P0 = Current stock price
D1 - Dividend at t =1
R - Required rate
G - Growth rate
P2021 = D2022/(R-g) = 3.53/(0.13-0.06) = 50.44
To find P2016, discount the future dividendsa dn P2021
P2016 = 1.97/(1+0.13)^1 + 2.25/(1+0.13)^2 + 2.56/(1+0.13)^3 + 2.92/(1+0.13)^4 + 3.33/(1+0.13)^5 + 50.44/(1+0.13)^5 = 36.26
Current stock price = $36.26