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Problem: Fast-Track Inc is a worldwide delivery company that is expected to generate a dividend (per share) of $1.20 one year from now (i.e. at t=1). You are expecting that on average Fast-Track Inc's dividends will grow at 6% each year after that into the indefinite future. Assume for simplicity that all dividends are paid at the end of each year. Suppose that the appropriate discount rate for these dividends is 9%.
Required:
Question 1: What is the current stock price for Fast-Track Inc? Assume that any dividend at t=0 has already been paid out.
Question 2: What do you expect the stock price of Fast-Track to be next year (i.e. at t=1) immediately after the dividend has been paid out?
Question 3: What is the expected return for holding the stock of Fast-Track over the year ahead? Hint: Find the IRR on the expected cash flows from buying and holding the stock for one year. The cash flows should include the purchase and sale of the stock as well as the dividend you will receive.
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