Sam Strother and Shawna Tibbs are senior vice presidents of First Strategies Investment Counsel (FSIC). They are co-directors of the company's pension fund management division, with Strother having responsibility for fixed income securities (primarily bonds) and Tibbs responsible for equity investments. A major new client has requested that FSIC present an investment seminar to its Executive Committee, and Strother and Tibbs, who will make the actual presentation, have asked you to help them. To illustrate the common stock valuation process, Strother and Tibbs have asked you to analyze the Temp Force Company, an employment agency that supplies keyboarders and computer programmers to businesses with temporarily heavy workloads. You are to answer the following questions:

a)What would the stock price be if its dividends were expected to have zero growth?

b)Now assume that Temp Force is expected to experience supernormal growth of 30% for the next 3 years, then to return to its long-run constant growth rate of 5%. What is the stock's value under these conditions? What is its expected dividend yield and capital gains yield in Year 1? In Year 4?

c)Is the stock price based more on long-term or short-term expectations? Answer this by finding the percentage of Temp Force's current stock price based on dividends expected more than 3 years in the future, (using the original assumptions).

d)Suppose Temp Force is expected to experience zero growth during the first 3 years and then to resume its steady-state growth of 5% in the fourth year. What is the stock's value now? What is its expected dividend yield and its capital gains yield in Year 1? In Year 4?

e)Finally, assume that Temp Force's earnings and dividends are expected to decline by a constant 5% per year, that is, . Why would anyone be willing to buy such a stock, and at what price should it sell? What would be the dividend yield and capital gains yield in each year?