Lady Antebella is trying to use a spreadsheet model to value the stock of Renaissance Limited. The model has projections for the next four years based on the following assumptions.

• Sales will be $250 million in Year 1.

• Sales will grow at 15% in Year 2 and Year 3 and 10% in Year 4.

• Operating profits (EBIT) will be 12% of sales in each year.

• Interest expense will be $10 million per year.

• Income tax rate is 21%.

• Earnings retention ratio would stay at 0.35.

• The per-share dividend growth rate will be constant from Year 4 forward and this final

  growth rate will be 200 basis points less than the growth rate from Year 3 to Year 4.

• The company has 10 million shares outstanding.

• Antebella uses the CAPM to estimate the cost of equity.

• She uses the annual yield of 2.5% on the 10-year Treasury bond as the risk-free return. She

  estimates the expected US equity risk premium to be 6.5%. The estimated Beta of Renaissance is 1.75.

  (a) Estimate the value of the stock at the end of Year 4 based on the above assumptions.

(b) Estimate the current value of the stock using the above assumptions.

(c) Lady Antebella is wondering how a change in the projected sales growth rate would affect the estimated value. Estimate the current value of the stock if the sales growth rate in Year 3 is 10% instead of 15%.