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FinanceQ&A LibrarySoftware company is a new start-up company and wil not pay dividends for the first five years of operation. It will then institute an annual cash dividend policy of $2.50 with a constant growth rate of 5% with the first dividend at the end of year six. The company will be in business for 25 years total. What is the stock price if an investory wants a 10% return? a 15% return?Question

Asked Feb 27, 2020

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Software company is a new start-up company and wil not pay dividends for the first five years of operation. It will then institute an annual cash dividend policy of $2.50 with a constant growth rate of 5% with the first dividend at the end of year six. The company will be in business for 25 years total. What is the stock price if an investory wants a 10% return? a 15% return?

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Step 1

a) Dividend for Year 6 (D6) would be $2.50 which will grow at a rate of 3% for the next 20 years. Present value of 20 dividend payments at the end of Year 5 would tus be as follows which rate ( r ) of 10%:

Price today is the present value of $30.28021014396 discounted at 10% for 5 years.

Answer: Price of the stock today at 10% return would be **$18.80.**

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