Stock

You are considering purchasing shares of a publicly traded company. The next dividend paid by the company will be $4.15. The appropriate equity cost of capital for the company is 9.3%. the company expects growth to stabilize at a long run growth rate of 5.0%.

Year Growth Rate .

1 11.0%

2 18.0%

3 15.0%

4 10.0%

5 14.0%

6 14.0%

7 16.0%

• What is the present value of the cash equivalent
• what is the price of the stock of this company today

if the company was not expected to experience abnormal growth, but instead was expected to grow at only the long run growth rate, what would the price of the stock be in the market today?

• By how much has the abnormal growth of the firm changed the value of the stock?