Bobster Corp., which is only ten years old, has never paid a dividend. Based on your analysis, you think it will pay the following dividends in the future:
• $1 one year from now
• $3 two years from now
• $5 three years from now
Other points:
• After the $5 dividend, you expect dividends to grow at a rate of 5% for the foreseeable future.
• After the dividend at the end of the fifth year, you think that the market will require a rate of return of 12% because you think the market will recognize the future growth and stability of the company at that time.
• At that point (after the dividend at the end of the fifth year), you will sell the stock.
• Because Bobster is not a mature company and has never paid a dividend, you require a rate of return on your 5-year investment of 35%.
How much are you willing to pay for the stock?