Question
HiTech Software doesnt currently pay any dividends due to its heavy investment in Research and Development. However, they are expected to begin paying dividends in
HiTech Software doesnt currently pay any dividends due to its heavy investment in Research and Development. However, they are expected to begin paying dividends in 4 years. That is, the firm will go 3 more years without dividends and then its expected to pay its first dividend of $4 per share in the fourth year. Once the company starts paying dividends, its expected to continue doing so. The company will have a dividend payout ratio of 40% and is expected to maintain Return on Equity of 20%. Based on the discounted dividend model, what is the maximum price you should be willing to pay for the stock today if the required rate of return on the stock is 15%? Hint: growth can be found as g=ROE*companys retention ratio.
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