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?
The solution does a great job of answering the question regarding stock comparisons. The solution is brief and concise and very easy to follow along. All the steps are clearly shown and Excel formulas are provided so that the student can answer similar questions in the future. It can be easily understood by anyone with a basic understanding of the topic. Overall, an excellent solution.