Sawchuck Consulting Has Been Profitable for the Last 5 Years,but

question 70

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? $\begin{array}{lccccccc}\text { Year } & 0 & 1 & 2 & 3 & 4 & 5 & 6 \\\hline \text { Growth rate } & \text { NA } & \text { NA } & \text { NA } & \text { NA } & 50.00 \% & 25.00 \% & 8.00 \% \\\text { Dividends } & \$ 0.000 & \$ 0.000 & \$ 0.000 & \$ 0.250 & \$ 0.375 & \$ 0.469 & \$ 0.506\end{array}$

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

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Definitions:

Financing Commitment

An assurance provided by a lender indicating the terms under which they agree to lend money to a borrower.

First Mortgage

A primary lien on a property that has precedence over all other claims or liens in the event of default or sale.

Mortgage Assignment

The transfer of a mortgage from one party to another, either for the benefit of changing lenders or selling the debt to another entity.

Reed Bank

A submerged reef in the South China Sea, known for its disputed territorial claims and rich natural resources.