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Suppose TB Pirates, Inc

Accounting Aug 20, 2020

Suppose TB Pirates, Inc. is expected to pay a $3 dividend in five year. If the dividend is expected to grow at 4% per year and the required return is 18%, what is the price now? What will the price in year five and six?

Expert Solution

Dividend (d₀) = $3

Growth rate (g) = 4%

Required return (r) = 18%

Price(P₀) = d₀ / (r - g)

= $ 3 / (0.18 - 0.04)

= $ 3 / 0.16

= $ 21.42857

Price in year 5

P5 = D5(1 + g) / (R - g) = D6 / (R - g)

P5 = 3*(1+.04)⁵ / (.18 - .04)

= 26.07

Price in year 5

P5 = D5(1 + g) / (R - g) = D6 / (R - g)

P5 = 3*(1+.04)⁵ / (.18 - .04)

= 26.07

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