Questions $10$ and $11$ are related.

TPP Inc., which owns and operates a chain of tattoo and piercing parlors, was founded $10$ years ago. It has been

profitable for the last $5$ years, but it has needed all of its earnings to support growth and thus has never paid a

dividend. Management has indicated it plans to pay $$0\mathrm{.}32$ dividend $2$ years from today and hinted it expects the

dividend to grow at a relatively rapid rate afterwards for several years. You forecast the dividend will increase at

a relatively rapid rate for several years and then grow at a constant rate of $3\mathrm{.}0\%$ thereafter, as shown in the table

below. Management's credibility with investors is high and it is believed the current price of the stock, $$31\mathrm{.}75,$

represents fair value $-$ i$.$e$.-$ the market price is equal to its intrinsic value, or is in equilibrium. What is the

expected rate of return on the common stock?

Year

Growth

Rates

$0$

$1$

$2$

$20\mathrm{.}00\%$

$3$

$417\mathrm{.}00\%$

$45$

$15\mathrm{.}00\%$

$10\mathrm{.}00\%$

$6\mathrm{.}50\%$

$3\mathrm{.}00\%$

a$.4\mathrm{.}40\%$

b$.4\mathrm{.}55\%$

c$.5\mathrm{.}39\%$

d$.6\mathrm{.}27\%$

e$.6\mathrm{.}34\%$

With reference to question $10,$ you must decide whether to invest in TPP Inc. With the yield to maturity on thirty$-$

year Treasury Bonds currently at $4\mathrm{.}90\%$ :

a$.$ An investor should be long TPP because it has an attractive risk$-$adjusted return compared to the Treasury

Bond.

b$.$ An investor should be long TPP because although its expected return is less than the Treasury Bond yield to

maturity, it has potential for rapid growth.

c$.$ An investor should be long TPP because its expected return is greater than the Treasury Bond yield to

maturity and it has potential for rapid growth.

d$.$ An investor should not invest in TPP because although its expected return is greater than the Treasury Bond

yield to maturity and it has greater risk.

e$.$ An investor should not invest in TPP because its expected return is less than the Treasury Bond yield to

maturity and it has greater risk.