a) Bacon Sign Inc. currently pays a dividend of $2.12 and the dividend is expected to grow at a constant rate of 3% per year. The stock is 25% more risky than the market as a whole. If the risk-free rate is 2% and the equity risk premium for the market is 8%, what is the estimated price of the stock?

b) Assume the information from part a) is correct except the firm expects dividends to grow at a rate of 10% per year for the next 4 years and then resume a long-run constant growth rate of 3% per year. What is the revised estimated current price of Bacon Signs stock?

c) What is the percent change in price as a result of the temporary supernormal growth in dividends? I.e. given your answer to part a), how much has the price increased, not in actual dollars, but in percentage terms.

d) What is the combined PV of the first four dividends in part a)

D0 = the dividend today $2.12

Constant g 3.00%

Beta 1.25

Rf 2.00%

Rm - Rf 8.00%

Required Return

b) Additional Assumptions

Temporary annual growth rate 10.00%

Number of years 4