Question

A local wine equipment manufacturer is planning to issue stocks. The company just paid a dividend of $3.60. They now expect to pay dividends to grow at 15% for the next 3 years and thereafter grow at an annual rate of 8%. What should be the price of the stock given these revised forecasts? Assume a rate of return of 16%

How does a cumulative voting system allow minority representation in corporations?

Answer 1

To calculate the price of the stock, we need to use the dividend discount model. Here are the steps:

1. Calculate the dividend growth rate for the first 3 years:

Dividend growth rate (years 1-3) = 15%

2. Calculate the dividend growth rate from year 4 onwards:

Dividend growth rate (year 4 onwards) = 8%

3. Calculate the expected dividend for year 1:

Expected dividend (year 1) = $3.60 * (1 + 15%) = $4.14

4. Calculate the expected dividend for year 2:

Expected dividend (year 2) = $4.14 * (1 + 15%) = $4.76

5. Calculate the expected dividend for year 3:

Expected dividend (year 3) = $4.76 * (1 + 15%) = $5.50

6. Calculate the expected dividend for year 4:

Expected dividend (year 4) = $5.50 * (1 + 8%) = $5.94

7. Calculate the expected dividend for year 5:

Expected dividend (year 5) = $5.94 * (1 + 8%) = $6.42

8. Calculate the price of the stock using the dividend discount model:

Price of the stock = ($4.14 / (1 + 16%)^1) + ($4.76 / (1 + 16%)^2) + ($5.50 / (1 + 16%)^3) + ($5.94 / (1 + 16%)^4) + ($6.42 / (1 + 16%)^5)

Price of the stock = $47.13

Therefore, the price of the stock should be $47.13 given the revised forecasts.

Cumulative voting is a system that allows minority representation in corporations by giving shareholders the ability to concentrate their votes on a smaller number of candidates. In a typical voting system, shareholders can vote for one candidate for each board seat, which can make it difficult for minority shareholders to elect a representative. With cumulative voting, shareholders can cast all their votes for a single candidate, which can increase the chances of electing a representative from a minority group. This system allows minority shareholders to have a greater say in the election of board members and can help to promote diversity and representation in corporations.