Question
NONCONSTANT GROWTH Assume that it is now January 1, 2016. Wayne-Martin Electric Inc. (WME) has developed a solar panel capable of generating 200% more electricity
NONCONSTANT GROWTH Assume that it is now January 1, 2016. Wayne-Martin Electric Inc. (WME) has developed a solar panel capable of generating 200% more electricity than any other solar panel currently on the market. As a result, WME is expected to experience a 15% annual growth rate for the next 5 years. Other firms will have developed comparable technology by the end of 5 years, and WME's growth rate will slow to 5% per year indefinitely. Stockholders require a return of 12% of WME's stock. The most recent annual dividend (D0), which was paid yesterday, was $1.50 per share.
a. Calculate WME's expected dividends for 2016, 2017, 2018, 2019, 2020.
b. Calculate the value of the stock today, . Proceed by finding the present value of the dividends expected at the end of 2016, 2017, 2018, 2019, and 2020, plus the present value of the stock price that should exist at the end of 2020. The year end 2020 stock price can be found by using the constant growth equation. Notice that to find the December 31, 2020, price, you must use the dividend expected in 2021, which is 5% greater than the 2020 dividend.
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