Question
You have been asked to try to help a friend determine the value of a share of stock in a start-up company. Initially, the owner
You have been asked to try to help a friend determine the value of a share of stock in a start-up company. Initially, the owner of a share today (year 0) will be expected to have to pay into the firm $2 per share in year 1 and $1 per share in year 2. Then the firm will be self-financing for the next 3 years (cash flows of 0 for years 3, 4, and 5). In year 6, the firm is expected to payout a dividend of $1 per share which you expect to grow at a rate of 40% per year for the next nine years (years 7 - 15). After this (year 16 on ) you expect the growth rate of dividends to drop to a rate of 5% in perpetuity (forever). The required rate of return for the riskiness of the equity of this firm is 12%. Determine the price for the share of stock today that is the present value of the future expected cash flows under these assumptions. Please use EXCEL and show working.
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