Question
Consider the stock of SLB Inc., a growth stock that will pay no dividend the next year. Starting in year two, the company will pay
Consider the stock of SLB Inc., a growth stock that will pay no dividend the next year. Starting in year two, the company will pay a dividend of $3 and will increase it by 10% for the next three years. Afterwards, dividends will grow by 5% per year indefinitely. The stock has a required rate of return of 15%. Answer the following questions. (SHOW YOUR WORK. Correct answers with no formulas/calculations receive no credit)
a) What is the value (price) of the stock today (i.e. P0)? Show your work and formulas.
b) What is the price of the stock at t=10, assuming the required rate of return (i.e. 15%) and the growth rate of dividends (i.e., 5%) do not change? Show your work and formulas.
c) What is the price of the stock at t=1, assuming the required rate of return (i.e. 15%) and the growth rate of dividends (i.e., 5%) do not change? Show your work and formulas.
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