Question
You own the stock of CATZ and its current price is $46.00/share. It pays no divident today. Based on your own research, you expect CATZ
You own the stock of CATZ and its current price is $46.00/share. It pays no divident today. Based on your own research, you expect CATZ to pay its first dividend of $3.20/share at the end of Years 1 and 2. Given its performance outlook, you further expect the Board of Catz to increase the Year 3 divident by 10% to $3.52; and then to incease it by 2.5% annually for the next 5 years (end of years 4 through 8); after which it will grow by 1.5% annually forever.
You enjoy a number of investment alternatives that will, on averae, provide you with a 9.0% annual return (Required rate of return is 9%). In light of this, what should be CATZ's stock price? Should you buy more CATZ stock at the current $46 price; or should you sell all your current CATZ holdings and reinvest the proceeds elsewhere?
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