Problem:

You want to invest in MicroSoft Company. The MicroSoft currently is paying no dividend because of depressed earnings. A recent change in management promises, however, a brighter future. Investors expect Micro Soft to pay a dividend of $1 next year (the end of the year). This dividend is expected to increase to $2 the following year and to grow at a rate of 10 percent per annum for the following two years (years 3 and 4). A good new investor, expects the price of the stock to increase 50 percent in value between now (time zero) and the end of year 3. Justify your answer with the appropriate computations.