Problem 7-12 Nonconstant Growth Stock Valuation

Assume that the average firm in your company's industry is expected to grow at a constant rate of 6% and that its dividend yield is 8%. Your company is about as risky as the average firm in the industry and just paid a dividend (D₀) of $3. You expect that the growth rate of dividends will be 50% during the first year (g_0,1 = 50%) and and 25% during the second year (g_1,2 = 25%). What is the required rate of return on your companys stock? What is the estimated value per share of your firms stock?

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