Sawchuck Consulting Has Been Profitable for the Last 5 Years

question 47

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:

Ethically Bound

Obligation to adhere to a set of moral principles and standards of behavior, particularly in professional settings.

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Evidence given by a person who has witnessed an event or crime, regarding their observations.

Legal System

The system of rules and guidelines, usually enforced through a set of institutions, used to govern a community, society, or country.

Confidence

The feeling of self-assurance arising from an appreciation of one's own abilities or qualities.