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1. A firm is expected to have a high growth rate in the next 3 years and a stable growth rate of 5% a year
1. A firm is expected to have a high growth rate in the next 3 years and a stable growth rate of 5% a year forever after that. Use the following information to find the stock value. Inputs for the high growth period: Current earnings per share (EPS) = $4.00 Current dividend per share ((DPS) = $1.00 Length of the high-growth period = 3 years Long-term bond rate (proxy for the risk-free rate) = 5% Market risk premium = 6% Beta of the stock for the high-growth period = 1.7 Return on assets (ROA) during the high growth period = 23% Debt to equity ratio during the high growth period = 0.70 Before-tax interest rate on debt for the high growth period = 7% Tax rate during the high growth period 25% Inputs for the stable growth period: Stable growth rate forever = 5% Beta of the stock for the stable growth period = 1.1 Long-term bond rate (proxy for the risk free rate) = 5% Market risk premium = 6% Return on assets (ROA) during the stable growth period = 0.16 Debt to equity ratio during the stable growth period = 0.70 Before-tax interest rate on debt for the stable growth period = 6% Tax rate during the stable growth period = 25% Assume that the dividend payout ratio remains constant at the current level for the first three years
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