Question

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 1 year from now. It is expected to grow at a rate of 15 percent per year for the following 7 years. Coley, a naïve 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 3 years. He believes that the stock will increase in value to $30 at the end of 4 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?

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