Space X has paid a dividend of $3/share for the last reporting year. The company is the leader in its industry, and it has just gained a new contract with NASA. Working on the new contract will lead to the company’s increased operations for the next 6 years. Due to that increase in activity, for the next 6 years the company will be able to constantly grow dividends by 7%.

After that first period, the company anticipates a second period, with huge demand for its products and services. It is anticipated that that the second period will last for 8 years, and will increase the company’s activities so much that it will allow the company to grow its dividends by 9% every year.

Unfortunately, by the end of that second period the competition will probably catch up with Space

X. Thus, from the end of the second period onwards, for the foreseeable future, the dividends will only increase by 0.5% every year.

Note that the the annual return on a market portfolio is 5% and the annual T-bills return 3%. Space

X has a beta of 8.5.

1. What is the discount rate of the company?

2. What is the value of the company as of the end of the second period?

3. What is the present value of the company’s first period dividends?

4. What is the present value of the company’s second period dividends?

5. What is the present value of the company?

Answer rating: 100% (QA)

Note that the the annual return on a market portfolio is 5 and the annual Tbills return 3 Space X has a beta of 85 1 What is the discount rate of the ... View the full answer