Sawchuck Consulting Has Been Profitable for the Last 5 Years

question 67

Multiple Choice

Sawchuck Consulting has been profitable for the last 5 years, but it has never paid a dividend.Management has indicated that it plans to pay a $0.25 dividend 3 years from today, then to increase it at a relatively rapid rate for 2 years, and then to increase it at a constant rate of 8.00% thereafter.Management's forecast of the future dividend stream, along with the forecasted growth rates, is shown below.Assuming a required return of 11.00%, what is your estimate of the stock's current value? $$\begin{array} { l c c c c c c c } \text { Year } & 0 & 1 & 2 & 3 & 4 & 5 & 6 \\\hline \text { Growth rate } & \text { NA } & \text { NA } & \text { NA } & \text { NA } & 50.00 \% & 25.00 \% & 8.00 \% \\\text { Dividends } & \$ 0.000 & \$ 0.000 & \$ 0.000 & \$ 0.250 & \$ 0.375 & \$ 0.469 & \$ 0.506\end{array}$$

• A) $9.94
• B) $10.19
• C) $10.45
• D) $10.72
• E) $10.99

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Definitions:

Alcohol

Organic compounds characterized by the presence of one or more hydroxyl (-OH) groups attached to a carbon atom.

Alkyne

A hydrocarbon that contains at least one carbon-carbon triple bond, characterized by the formula CnH2n-2.

1H NMR

A type of nuclear magnetic resonance spectroscopy focusing on the detection of hydrogen-1 isotopes, used to determine the structure of organic compounds.

KMnO4

Potassium permanganate is a chemical substance utilized as an oxidizing agent in a variety of chemical processes.