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XYZ company is currently restructuring. As a result, the market expects zero dividends for the following three years; from year 4 on, when the restructuring is expected to have been successfully completed, constant dividends of $ 8 per share are expected forever. Assume that

• the applicable discount rate for holding XYZ stock (XYZ's "required rate of return", as we call it) is 16%
• the market price for XYZ stock is and will be "fair", that is: equal to the present value of dividends, and that the future evolves exactly according to expectations;
• XYZ stock is traded "ex-dividend", i.e. the right to year t's dividend belongs to the owner of the share at the end of year t-1.

i) What is an XYZ share worth in year 3?
ii) What will the price of an XYZ stock be in years 0 through 4.

Microeconomics, Economics

  • Category:- Microeconomics
  • Reference No.:- M945164

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