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(a) Fast Grow Corporation is expecting dividends to grow at a 20% rate for the next two years. The corporation just paid a $2 dividend
(a) Fast Grow Corporation is expecting dividends to grow at a 20% rate for the next two years. The corporation just paid a $2 dividend and the next dividend will be paid one year from now. After two years of rapid growth, dividends are expected to grow at a constant rate of 9% forever. The required rate of return is 14%. If the current stock price is $54, is Fast Grow Corporation over or undervalued? Show your detailed calculations. (10 marks) (b) Tayco Corporation has just paid dividends of $3 per share. The earnings per share for the company was $4. You believe that the appropriate discount rate is 15% and the long term growth rate is 6%. If the current trailing P/E ratio is 11 times, is the firm over or undervalued? Show all the calculations (10 marks)
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