Question
TPP Inc., which owns and operates a chain of tattoo and piercing parlors, was founded 10 years ago. It has been profitable for the last
TPP Inc., which owns and operates a chain of tattoo and piercing parlors, was founded 10 years ago. It has been profitable for the last 5 years, but it has needed all of its earnings to support growth and thus has never paid a dividend. Management has indicated it plans to pay $0.32 dividend 2 years from today and hinted it expects the dividend to grow at a relatively rapid rate afterwards for several years. You forecast the dividend will increase at a relatively rapid rate for several years and then grow at a constant rate of 3.0% thereafter, as shown in the table below. Managements credibility with investors is high and it is believed the current price of the stock, $31.75, represents fair value i.e. - the market price is equal to its intrinsic value, or is in equilibrium. What is the expected rate of return on the common stock?
Year Growth Rate
0
1
2
3 20.00%
4 17.00%
5 15.00%
6 10.00%
7 6.50%
8 3.00%
a. 4.40% b. 4.55% c. 5.39% d. 6.27% e. 6.34%
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