1. Stock Valuation:

Primrose Corporation is considering investing in Metro Corporation by purchasing 10,000 shares of the corporations stock. The Metro Corporation just paid a dividend of $1.15. The dividends are expected to grow at 10 percent over the next 5 years. The company has a payout ratio of 40 percent and an expected PE ratio of 21. Based on the companys payout ratio, earnings per share in year 5 would be $4.64 (EPS₅ = D₅ / Payout ratio = $1.86 / .40 = $4.64).

1. What is the future (terminal value) stock price in five years? Show your work.

2. What is the stock price today assuming a required return of 11 percent on this stock? Show your work.

3. Assuming Primrose sells all $10,000 shares of stock at the end of the 5^th year, how much money will the company gain or lose? Show your work.