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gladu
16 days ago
9

CHERCRO Inc. is a startup. It is estimated that the company will not be paying any dividends for the coming 4 years. If the comp

any distributes $3 per share 5 years from today, the growth rate of the dividends will be 2% per year going forward. If, instead the company distributes $2 per share at the 5th year, the growth rate of dividends will be 6% per year. As an investor of CHERCRO, which policy would you support if the market rate is 12%? (Hint: the value of a share is the expected present value of the entire future dividend stream)
Business
1 answer:
Mariulka [3.4K]16 days ago
8 0
Policy 1: The price at the end of year 4 is calculated as D5/(rs-g) = 3 /(.12-.02) = 3/.10 = $30 per share. The current price is determined using PVF12%,4* Price at year 4 =.63552 * 30 = $19.07 per share. Policy 2: The price at the end of year 4 is D5/(rs-g) = 2 /(.12-.06) = 3/.06 = $50 per share. The current price is then calculated as PVF12%,4* Price at year 4 =.63552 * 50 = $31.78 per share. Policy 2 should be favored as it offers a higher market price per share.
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