During the immediately preceding 4 years, the annual dividend paid on the Garcia Energys common stock has grown from $3.91 to $4.58 (Do), or by approximately a dollar, which equates to a 4% growth rate. Andrew Potts believes that without a proposed investment, the historical annual dividend growth rate will continue into the future. Currently the required rate of return on the common stock is 13% and the stock price is $52.92.

Andrew Potts research indicates that if a proposed expansion is undertaken, the annual rate of dividend growth will rise to 7% and the coming years dividend will rise to $4.90 per share. He feels that in the best case, the dividend would continue to grow at this rate each year forever into the future. Or, essentially, that he would replace this expansion project with a similar project repeatedly in the future. In the anticipated case, the 8% annual rate of dividend growth would continue for only two years, and then at the beginning of the third year the dividend growth rate would return to the 4% rate that was experienced over the past four years. In the worst case, the firms growth rate rise by 8% for one year and then drops to 2% percent, due to the use of valuable managerial resources managing inventory assignment across Garcia Energy and the losses incurred if the economy were to deteriorate in a world where it had amassed extra inventory.

As a result of the increased risk associated with the proposed risky investment, the required rate of return on the common stock is expected to increase by 1% to an annual rate of 14%. This required rate of return applies regardless of which dividend growth outcome occurs. Armed with the preceding information, Andrews has tasked you with assessing the impact of the proposed risky investment on the market value of Garcia Energys stock. In this scenario analysis, your examination has shown that the best case scenario is likely to happen 10 percent of the time, optimistic case 15 percent of the time, anticipated case 50 percent of the time, low growth case 15 percent of the time and negative growth 10 percent of the time.

Note on grading: Correct prices have the correct inputs, so you should report the inputs (D₁, D₂, D₃, r_s, g) in computing P_o. Reporting inputs also allows you to earn partial credit in instances wherein you have not computed the correct share price.

4. In the Executive Summary, summarize your findings here, including a weighted average of the expected stock price (i.e., Summation of probability times price in a given outcome), relative to the current stock price. (2 points)