Question
Jones Inc currently pays no dividends, choosing instead to re-invest all earnings in the firm. However, the firm anticipates that beginning in year 7, they
Jones Inc currently pays no dividends, choosing instead to re-invest all earnings in the firm. However, the firm anticipates that beginning in year 7, they will run out of profitable investments and begin paying a dividend of $5.00 per share. They anticipate that dividends will grow at 3% per year in perpetuity following that.
The required return on the cash flows of Jones' dividends is 14% per year.
a) What is the equilibrium value of a share of Jones Inc today?
b) Assuming that nothing about Jones cash flows, or its required return, changes, what should be the equilibrium value of a share of Jones at time 5? At time 6?
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