Mid-Valley Power and Electric is expected to pay an annual dividend of $3.97 per share in one year, which is then expected to grow by 10% per year. The required rate of return is 14%.
Part 1: What is the current stock price?
Part 2: What is the current stock price if the annual dividend of $3.97 is about to be paid? i.e. paid tomorrow or later today. (You can assume the payment is being made today, there is no need to worry about a day's worth of discounting.)
Part 3: Now assume that the annual dividend of $3.97 is about to be paid exactly as in Part 2. However, the company also announces that due to an unexpected one-time shortfall, it is canceling next year's dividend. The company expects to resume normal dividend payments two years from now, starting with a dividend of $4.367 in two years.
Assume that you believe that the cancellation of next year's dividend really is a one-time issue, and that the company can continue to grow its dividends at 10% after year 2.
What is the fair price for the stock if the required return is still 14%?
