Sports Novelties, Inc., has experienced an explosion in demand for its feathered football novelties. The firm currently (time 0) pays a dividend of $0.25 per share. This dividend is expected to increase to $0.75 per share one year from now.
It is expected to grow at a rate of 15 percent per year for the following seven years. Coley, a naive investor, seeks your advice regarding the current value of this stock. Coley plans to purchase this stock today, if the price is right, and to hold it for three years.
He believes that the stock will increase in value to $30 at the end of four years. What is the current value of this stock to Coley if he requires a 20 percent rate of return on stocks of this risk level?