Robinson Inc. is a fast growing technology company. Management projects rapid growth of 20 percent for the next four years. After that, a constant-growth rate of 6 percent is expected. The firm expects to pay its first dividend of $5.00 three years from now. Dividends will grow at the same rate as the firm and the required rate of return on stocks with similar risk is 20 percent. Required: a) Determine the current price per share. b) If the price of the stock is currently $ 40.00, would you recommend that the stock be purchased

Question

Business

Jensen Cummings

5 August, 10:29

Robinson Inc. is a fast growing technology company. Management projects rapid growth of 20 percent for the next four years. After that, a constant-growth rate of 6 percent is expected. The firm expects to pay its first dividend of $5.00 three years from now. Dividends will grow at the same rate as the firm and the required rate of return on stocks with similar risk is 20 percent. Required: a) Determine the current price per share. b) If the price of the stock is currently $ 40.00, would you recommend that the stock be purchased

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Answers (1)

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Deacon Benton · Answer 1

a. Cannot be determined

b. No

Explanation:

The current price per share cannot be determined with the information provided. Given that the dividend payable three years from now is $5, we will also require the rate of return to calculate the price per share.

Dividend = $5

Rate of return = 20%

Share value = $25

If the current price is $40 and the price three years hence is $25, we can consider the shares to be overpriced