The Alpha Tool Corporation has never paid a dividend, but the new company president has announced that the firm would pay its first dividend exactly two years from now. That dividend is expected to be $2 per share. It is anticipated that this dividend will grow by 15 percent for the following three years, and by 10 percent for the two years after that.
No explicit dividend forecast is available beyond that point in time, although the firm is expected to continue to pay some dividends every year. The stock's current price-to-earnings (P/E) multiple is 15 times. The company (and investigators) expect the P/E multiple to remain constant for the foreseeable future. Earnings per share at the end of year 6 are expected to be $7.
The company's marginal tax rate is 40 percent and the firm has a capital structure consisting of 40 percent debt (at a pretax cost of 20 percent) and 60 percent common equity. If you require a 15 percent rate of return on this stock, how much would you pay for one share of stock today?