As an analyst for FinCorp Inc., you are responsible for many firms, including ADFC. Currently you have a “hold” recommendation on ADFC.18 the current price of ADFC is $140. You have conducted an extensive analysis of the industry and you feel that the probability the firm will capture a substantial share of the new market is 35 percent. If the firm is able to capture the new market, you are expecting earnings to grow at a rate of 45 percent per year for the next five years.
In that case, the stock price would rise to $220 due to the unusually high growth rate of future earnings. However, you feel there is a 40-percent probability that the firm will face serious difficulties in the near future, in which case the stock price will fall to $100, and the earnings growth rate will drop to 3 percent. There is a 25-percent chance that nothing will change for the firm and its earnings growth rate will remain at 12 percent. Should you change your recommendation?