Helen Plans to Purchase a Stock That Is Currently Paying

Helen plans to purchase a stock that is currently paying no dividend. Helen expects the stock to pay its first dividend of $5.00 per share in eight years. Furthermore, she expects the firm to have an ROE of 16% and a dividend payout ratio of 60% thereafter. What value should Helen place on the stock now if her required return on the stock is 8.75%?

Correct Answer:

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g = 0.16 x (1 - 0.60) = 0.064
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