Question: Lab X is a profitable firm that is not paying a dividend on its common stock.
Jim, an analyst for Invest Today, believes that Lab X will begin paying a $2.00 per share dividend in two years and that the dividend will increase 5% thereafter.
Bob, one of Jim's colleagues at the firm, is less optimistic.
Bob thinks that Lab X will begin paying a dividend in four years, that the dividend will be $2.00, and that it will grow at 4% annually.
Jim and Bob agree that the required return for Lab Xis 12%.
Please answer the following:
a. What value would Jim estimate for this firm?
b. What value would Bob assign to the Lab X stock?