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Company A is growing quickly, with current annual increases of 15% per year in both sales and net income. To fund its growth, it is

Company A is growing quickly, with current annual increases of 15% per year in both sales and net income. To fund its growth, it is reinvesting all of its net income each year in new productive opportunities (payout ratio = 0). Yesterday, the firm reported net income of $3.00 per share. This growth is expected to last for another five years (to the end of year 5 on the timeline), at which time they will have exploited most of the available high growth opportunities. The growth rate in net income will then fall to 7% and the firm will adopt a payout ratio of 50% with the first dividend paid at time period 6.

If shareholders require a 17% return to hold the firms shares, how much would you expect each share to sell for today?

Multiple Choice

  • $14.72

  • $11.12

  • $16.32

  • $15.28

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