Question
Eddie is thinking about investing in stocks of IDK Inc. IDK just announced its earnings per share of $6 today, but the company currently pays
Eddie is thinking about investing in stocks of IDK Inc. IDK just announced its earnings per share
of $6 today, but the company currently pays no dividends. The earnings are expected to grow at
12% per year for the following three years. After that, the earnings will grow at 8% per year for
five years and then slow down to 2% forever. IDK plans to pay its first annual dividend at the end
of Year 4 by distributing 50% of its earnings to shareholders, and the company does not plan to
change its payout policy in the foreseeable future. How much is Eddie willing to pay for a share
of IDK if the discount rate is 12% (EAR)
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