TotalShield, LLC is a PPE-producing company that distributes 20% of its earnings as dividends. An institutional investor plans to buy and hold the companys stock for 10 years. Given current level of idiosyncratic risk, the investor seeks 20% rate of return. The investor expects the stock to trade at 30 times earnings at the end of 10 years. Current EPS is $4 (EPS0=$4). Earnings are expected to grow at a rate of 24% during the first year and decline by 2% every year during the following 4 years reaching 16% in year 5. The growth rate will continue to be 16% for the remaining 5 years.

1. Use the combined earnings and dividend model to calculate the current value of the stock

2. Use the same model to calculate the value of the stock at the end of 3 years

3. How much is the dividends growth rate after year 10?

G EPS Price 10 PV3 CF=D+FP 10 0.80 PV. NA 4.00 TotalShield LLC. Time 0 1 2 3 4 NA 24% NA N/A 5 16% 16% 5 6 7 8 9 10 16% Stock Value = Sum of PV of CFS c. Dividends Growth Rate after Year 10