The fast-growing firm of GoodCoffee Inc. is planning its first issue of public stock. The firm will pay out its first dividend of $1 one year from today. Analysts expect annual dividends to grow at a rate of 12% per year for each of the following two years (year 2 and year 3). After that, the dividends will grow at a constant rate of 7% indefinitely. Investors require a 10% return from holding GoodCoffee stock. a) What price should GoodCoffee Inc. set for its new stock? b) What is the stock price at the end of year 3 (after paying out D1, D2 and D3)? Assume no change in the future dividend forecasts or the discount rate.
The fast-growing firm of GoodCoffee Inc. is planning its first issue of public stock. The firm will pay out its first dividend of $1 one year from today. Analysts expect annual dividends to grow at a rate of 12% per year for each of the following two years (year 2 and year 3). After that, the dividends will grow at a constant rate of 7% indefinitely. Investors require a 10% return from holding GoodCoffee stock. a) What price should GoodCoffee Inc. set for its new stock? b) What is the stock price at the end of year 3 (after paying out D1, D2 and D3)? Assume no change in the future dividend forecasts or the discount rate.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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The fast-growing firm of GoodCoffee Inc. is planning its first issue of public stock. The
firm will pay out its first dividend of $1 one year from today. Analysts expect annual
dividends to grow at a rate of 12% per year for each of the following two years (year 2
and year 3). After that, the dividends will grow at a constant rate of 7% indefinitely.
Investors require a 10% return from holding GoodCoffee stock.
a) What price should GoodCoffee Inc. set for its new stock?
b) What is the stock price at the end of year 3 (after paying out D1, D2 and D3)? Assume
no change in the future dividend
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