Question 2

i) Find the current stock value (P0) for a firm that is expected to have EXTRAORDINARY growth of 25% for 4 years, after which it will face more competition and slip into a CONSTANT-GROWTH RATE of 5%. Its required return is 14% and next year's dividend (Div1) is expected to be $5.00.

ii) Show numerically that investment horizon has no bearing on current stock price. For your illustration assume investment horizons of 3 versus 5 years and the following facts: The stock is correctly priced at $40.00, has a required return of 17%, a growth rate of 7%, and has just paid a $3.74 dividend.