While Dynamic Designs is profitable, it is not paying a dividend on its common stock. Joe Neimer, an analyst for Schwab, believes that Dynamic Designs will begin paying a $1.00 per share dividend in two years and that the dividend will increase 5% annually thereafter
(Constant growth model)
(Constant growth model) While Dynamic Designs is profitable, it is not paying a dividend on its common stock. Joe Neimer, an analyst for Schwab, believes that Dynamic Designs will begin paying a $1.00 per share dividend in two years and that the dividend will increase 5% annually thereafter. Andy Neimer, Joe’s brother, is an analyst for Merrill Lynch and Andy is pessimistic about Dynamic Design’s future. Andy thinks that Dynamic Designs will begin paying a dividend in four years, that the dividend will be $1.00, and that it will grow at 3% annually. The brothers can agree on the required return for Dynamic Designs, which is 12%.
a. What value would Joe estimate for this firm?
b. What value would Andy assign to the Dynamic Designs stock?
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