Question 1:

Assume that it is now January 1, 2010. ABC is experiencing is using all the earnings for expansion and therefore, has no dividends. The company will pay a dividend of $1.5 coming 4 years from today. The dividends are expected to grow at a super-normal growth rate of 20% for year 5 and year 6, after which the company achieves a long run growth rate of 6%. Stockholders require a return of 12%.

a. Calculate ABC's non-constant dividends from year 1 to year 6. Also make a time-line.

b. Calculate ABC's horizon value.

c. Calculate the value of the stock today, P0.

d. Calculate the expected dividend yield, capital gains yield, and total return expected for 2010.