Question
Your task is to value a share of String Cheese Inc. (SCI) stock. The firm is not expected to pay a dividend at t=1. Div2
Your task is to value a share of String Cheese Inc. (SCI) stock. The firm is not expected to pay a dividend at t=1. Div2 is forecasted to be $15.00.
Dividends will then grow by 8%/year for three years. Thereafter, dividends will grow by 5.00%
forever. The required return on SCI's stock is 13.00%.
Here is a timeline for SCI stock's anticipated dividend stream:
time | 0 | 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | 9 | etc. |
Divt | 15.00 | 15.00 x 1.08 | 15.00 x1.08^2 | 15.00 x1.08^3 | 15.00 x1.08^3 x1.05 | 15.00 x1.08^3 x1.05^2 | 15.00 x1.08^3 x1.05^3 | 15.00 x1.08^3 x1.05^4 | g=5% forever |
Note that Div5 anchors the growing perpetuity, as every dividend after it is bigger than the prior one by 5%.
What is a fair price for SCI stock today?
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