Simtek currently pays a $2.50 dividend (D0) per share. Next year’s dividend is expected to be $3 per share. After next year, dividends are expected to increase at a 9 percent annual rate for three years and a 6 percent annual rate thereafter.
1. What is the current value of a share of Simtek stock to an investor who requires a 15 percent return on his or her investment?
2. If the dividend in year 1 is expected to be $3 and the growth rate over the following three years is expected to be only 7 percent and then 6 percent thereafter, what will the new stock price be? Calculate.