(ST–2)

Supernormal Growth Stock Valuation Snyder Computer Chips Inc. is experiencing a period of rapid growth. Earnings and dividends are expected to grow at a rate of 15% during the next 2 years, at 13% in the third year, and at a constant rate of 6% thereafter. Snyder’s last dividend was

$1.15, and the required rate of return on the stock is 12%.

a. Calculate the value of the stock today.

b. Calculate ^P1 and ^P2.

c. Calculate the dividend yield and capital gains yield for Years 1, 2, and 3.

296 Part 3: Stocks and Options Problems Answers Appear in Appendix B EASY PROBLEMS 1–5