Question
GOL.com is a highly priced Internet stock whose earnings in the coming year (E1) are expected to be $0.50 per share. Investors expect these earnings
GOL.com is a highly priced Internet stock whose earnings in the coming year (E1) are expected to be $0.50 per share. Investors expect these earnings to grow at 100% (g) per year for 4 years. This growth rate is estimated by assuming the GOL reinvests all earnings (b = 1) at a return (R) of 100% per year. After 4 years of high growth, competition is expected to sharply reduce the profitability of GOL.com. Consequently, the forecast is that company will then retain only 50% of its earnings and invest them at a return of 25% per year. The remaining 50% of earnings will be paid out as dividends to stockholders. Investors in GOL.com require a return (R) of 15% per year; 1.) What is the price per share of the GOL.com? 2.) What is the premium for growth of the stock? 3.) What is GOL.coms PE Ratio? 4.) Suppose GOL.com announces that it will pay an additional dividend of $1 per share in each of the first 4 years, what well be the new price of GOL.com?
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