Tank Industries Washers decides to pay the following dividends over the next four years: $2.50, $3.20, $4.75 and $5.20 respectively (starting at time 1).
a. After year 4, the firm decides a constant growth rate of 3%. If investors needs 11%, what is the present share price?
b. The CEO, main Payne, has identified various new investment opportunities. He is trying to convince investors to back his strategy. He would need to keep the dividends at $2.50 each year for the next four years. After year 4, the growth rate would be 10% forever. Based on the increased risk, the other investors increase the needed return to 15%. Should they back his strategy? Hint: Re-estimate the present price based on the new cash flows.