Question

singh sport training currently pays no dividends. the company is anticipating annual dividends of $.03, $.07, $.12, and $.25 over the next 4 years, respectively. after that, the company anticipates increasing the dividend by 2.5 percent per year. to value this stock as of today, an analyst would most likely first determine the value of:

Answer 1

Based on the fact that Singh Sport Training will increase dividends by 2.5% after the 4th year, the first thing an analyst would need to determine before finding the value of the stock is P₄.

How to solve for stock value?

When given the dividends that a company plans to pay in future, along with a dividend rate that would be indefinite, you should use the Dividend Discount Model.

Assuming this is the model that would be used by the analyst to determine the value of Singh Sport Training stock, the first thing the analyst would need to do is to solve for the value of the stock on the 4th year.

To solve for this value, the analyst would use the dividend growth rate to find the next dividend, and then divide it by the difference between the Expected return and the growth rate. This value on the 4th year will then be discounted along with the dividends from years 1 to 4, to find the stock value.

Options for this question include:

• P₆
• P₁
• P₄
• P₅

• P₃

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