Problem:
Simpkins Corporation is expanding rapidly, and it does not pay any dividends because it currently needs to retain all of its earnings. However, investors expect Simpkins to begin paying dividends, with the first dividend of $2.00 coming 3 years from today. The dividend should grow rapidly - at a rate of 30% per year - during Years 4 and 5. After Year 5, the company should grow at a constant rate of 9% per year.
Required:
Question: If the required return on the stock is 16%, what is the value of the stock today?
Note: Provide support for your rationale.