Question
Hifalutin Inc., is experiencing a period of rapid growth. Earnings and dividends are expected to grow at a rate of 18 percent during the next
Hifalutin Inc., is experiencing a period of rapid growth. Earnings and dividends are expected to grow at a rate of 18 percent during the next two years, 15 percent in the third year, and then at a constant rate of 6 percent thereafter. Hifalutins last dividend, which has just been paid, was $1.15. If the market rate on the stock is 10 percent, what is the price of the stock today?
(Important hint: First compute the PV of the first 3 abnormal dividends individually. Then compute the estimated price at t=3 i.e. at the start of the long-run growth. Finally, find the present value at t=0 of the 3 abnormal dividends and the price at t=3).
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