Suppose the strategic options available to the Rollins company in the last problem result in temporarily enhanced growth. Each option can be associated with a super normal growth rate that lasts for some period after which growth returns to the firm’s normal 5%. Further suppose the duration of the super normal growth is a variable which can also be affected by strategic policy. Use the STCKVAL program for two-stage growth to develop the following chart assuming a required return of 10%.

The Price of Rollins Stock as a Function of Temporary Growth Rate

And Duration at a Required Return Rate of 10%

Super Normal Growth Rates (g1)

Can you use your chart to make any general comments about the risk-return trade-off under this assumption about the nature of the strategicoptions?

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12% 14% 16% 18% Duration of 2 gi in Years (n) 6 8