Very good Equity question

What value would be placed on a stock that currently pays no dividend but is expected to start paying a $1 dividend five years from now? Once the stock starts paying dividends, the dividend is expected to grow at a 5 percent annual rate. The appropriate discount rate is 12 percent. A) $8.11. B) $9.08. C) $14.29. D) $16.00. Have fun!


I got B as well. Got tricked initially into making D5 = 1.05

Also initially made d5 = 1.05… fortunately you call tell what the error was by the options. B


so D5 will be??

1/(.07) present valued at (1.12^4)

1/(1.12^5) + (1.05/.07)/(1.12^5)

B. I took D6 as 1.05 and got price at Y5 as 15. So total value at Y5 is 16 and then discount it back to 5 yrs @ 12. Is that the right approach?

p5 = 1.05/(.12-.05) = 15 d5 = 1 p0 = (d5 + p5)/(1.12)^5 = 9.08 b

You guys rock! B it is