Global Tek plans on increasing its annual dividend by 15 percent a year for the next four years and then decreasing the growth rate to 2.5 percent per year. The company just paid its annual dividend in the amount of $.20 per share. What is the current value of one share of this stock if the required rate of return is 17.4 percent

2.02

Explanation:

year 1 dividend = 0.2 x 1.15 = 0.23

year 2 dividend = 0.2 x (1.15^2)=  0.26

year 3 dividend = 0.2 x (1.15^3) =  0.30

year 4 dividend = 0.2 x (1.15^4) =  0.35

divdend value in the second stage

0.35 x 1.025 / (0.174 - 0.025) = 2.41

Determine the present value of the cash flows

Present value is the sum of discounted cash flows

Present value can be calculated using a financial calculator

year 1 dividend = 0.2 x 1.15 = 0.23

year 2 dividend = 0.2 x (1.15^2)=  0.26

year 3 dividend = 0.2 x (1.15^3) =  0.30

year 4 dividend = 0.2 x (1.15^4) =  0.35 + 2.41

i = 17.4  

To find the NPV using a financial calculator:

1. Input the cash flow values by pressing the CF button. After inputting the value, press enter and the arrow facing a downward direction.

2. after inputting all the cash flows, press the NPV button, input the value for I, press enter and the arrow facing a downward direction.  

3. Press compute  

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