ou are a stock analyst in charge of valuing high-technology firms, and you are

expected to come out with buy-sell recommendations for your clients. You are

currently analyzing a firm called etalk.com that specializes in internet-based

communication. You are expecting explosive growth in this area. However, the

company is not currently profitable even though you believe it will be in the

future. Your projections are that the firm will pay no dividends for the next 2

years. Three years from now, you expect the stock to pay its first dividend of

$1

.

50 per share. You expect dividends to increase at a rate of 10 percent per

year for two years after that. At that point, the industry will start to mature and

growth will slow down; dividends will continue to grow at a rate of 5 percent per

year for the foreseeable future.

The stock is trading on the LSM Stock Exchange for $15 per share. If you

believe that the required rate of return is 12 percent, what is your estimate of

the value of the stock, and should you issue a recommendation to buy or to

sell?

(6 marks)