A startup will start paying dividends at the end of year 6. The initial growth rate is 10%. This growth rate will continue until year 10. Starting from year 11, the growth rate drops to 5%. The discount rate is 20%. What should the price be at the end of year 5 if the initial dividend is $10.

$‭76.46

Explanation:

The price at the end of year 5 is the sum of the present values of the dividends from year 6 to 10 and the present value of the terminal in year 10.

Year                  Dividends                    Discount factor       Present value

  6                         10                                  ( 1 + 20%)                  8.33

  7                      10 * 1.1 = 11                         (1 + 20%)²                 7.64

  8                      10 * 1.1² = 12.1                    (1 + 20%)³                 7.00

  9                      10 * 1.1³ = 13.31                  (1 + 20%)⁴                 6.42

 10                      10 * 1.1⁴ = 14.641               (1 + 20%)⁵                 5.88

Total                                                                                             35.27

Terminal value at year 10 = Next dividend / (Discount rate - growth)

= (14.641 * 1.05) / (20% - 5%)

= $‭102.487‬

Present value = ‭102.487‬/ (1 + 20%)⁵ = $41.187

Price of stock = 41.187 + 35.27

= $‭76.46

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whole quiz

1. the sum of all activities involved in getting high-quality products into the marketplace

2.operations

3. the principle of looking at the supply chain as a whole in order to improve the overall flow through the system.

4. produced; performed

5. activities producing tangible products, such as radios, newspapers, buses, and textbooks.

6. activities producing intangible and tangible products, such as entertainment, transportation, and education.

7.   customer focus

8. analyzing a competitor's products to identify desirable improvements

9. the systematic direction and control of the processes that transform resources into finished projects that create value for and provide benefits to consumers.

10. operation management.

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