Phoenix Industries has pulled off a miraculous recovery. Four years ago it was near bankruptcy. Today, it announced a $2 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 $4 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 17% on this stock, what must be its price? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Question

Business

Maverick Klein

23 November, 14:38

Phoenix Industries has pulled off a miraculous recovery. Four years ago it was near bankruptcy. Today, it announced a $2 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 $4 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 17% on this stock, what must be its price? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

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Answers (1)

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Jonah Bright · Answer 1

Phoenix right now will grow its dividend by $1 per share and then after the third year the dividend growth rate is expected to settle down, so we need to find the price of the stock when the growth rate will settle down and then discount it, and get its present value.

Dividend 1 year from now=2

Dividend 2 years from now=3

Dividend 3 years from now=4

Price 3 years from now = D * (1+G) / R-G

D=4

G=5% or 0.05

R = 17% or 0.17

Price = (4*1.05) / (0.17-0.05) = $35

The price 3 years from now will be 35 so we need to discount it back to present value.

35/1.17^3

=21.85

The current price of the share must be $21.85