Simtek currently pays a $4 dividend (D0) per share. Next year’s dividend is expected to be $4.75 per share. After next year, dividends are expected to increase at a 8 percent annual rate for 3 years and a 5 percent annual rate thereafter.
a. What is the current value of a share of Simtek stock to an investor who requires a 14 percent return on his or her investment?
b. If the dividend in year 1 is expected to be $4.75 and the growth rate over the following 3 years is expected to be only 7 percent and then 5 percent thereafter, what will the new stock price be?