One of the major reasons why so-called Internet stocks were so very highly priced (extremely high PE ratios) is because investors believed that the world of commerce a few years hence would be very different from what it is today.LOG.com is a highly priced Internet stock whose earnings in the coming year (E1) are expected to be $1 per share. Investors expect these earnings to grow at 100% (g) per year for 4 years. This growth rate is estimated by assuming that LOG reinvests all earnings (b=1) at a return (R) of 100% per year. After 4 years of this high growth, competition is expected to sharply reduce the profitability of LOG.com. Consequently, the forecast is that company will then retain only 60% of its earnings and invest them at a return of 20% per year. The remaining 40% of earnings will be paid out as dividends to stockholders. Investors in LOG.com require a return (k) of 20% per year:

1. What is the price per share of the LOG.com in year 4?

2. What is the price of the stock today?

3. What is the premium for growth of the stock?

4. What is the PE ratio?

Impact of additional dividends (assume here that everything else of the company is unchanged)

5. Suppose LOG.com announces that it will pay a $0.25 dividend per share in each of the next 4 years. What will the new price of the stock be when this is announced?