Question
A company's earnings are expected to grow at 5% per year for the next 4 years, then stabilize at a 3% growth rate from then
A company's earnings are expected to grow at 5% per year for the next 4 years, then stabilize at a 3% growth rate from then on. The company's most recent dividend is $1 (D0). If the required return for an investment of this type is 10%, what is the intrinsic value (fair price) for this share of stock?
(Note: this is called a supernormal growth of stock, using Gordon's Growth Model with at least two levels of growth before assuming a constant growth rate. Apply additivity of time value of money.)
Undergraduate Corporate Finance. Please show all intermediate calculations, thanks!
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