Sanford Corporation expects to have earnings this coming year of $3 per share. Sanford plans to retain all of its earnings for the next two years. For the subsequent two years, the firm will retain 50% of its earnings. It will then retain 20% of its earnings from that point onward. Each year, retained earnings will be invested in new projects with an expected return of 25% per year. Any earnings that are not retained will be paid out as dividends. Assume Sanfords share count remains constant and all earnings growth comes from the investment of retained earnings. If Sanfords equity cost of capital is 10%, what price would you estimate for Sanford stock? (a) What are the earnings and dividends over the first three years?

(b) At what rate will the earnings and dividends grow in year 4 and 5 s? What are the dividends at the end of year 4 and 5?

(c) What price would you estimate for Sanford stock?