The chairman of Heller Industries told a meeting of financial analysts that he expects the firm’s earnings and dividends to double over the next six years. The firm’s current (that is, as of year 0) earnings and dividends per share are $4 and $2, respectively.
a. Estimate the compound annual dividend growth rate over the 6-year period (to the nearest whole percent).
b. Forecast Heller’s earnings and dividends per share for each of the next six years, assuming that they grow at the rate determined in Part a.
c. Based on the constant growth dividend valuation model, determine the current value of a share of Heller Industries common stock to an investor who requires an 18 percent rate of return.
d. Why might the stock price calculated in Part c not represent an accurate valuation to an investor with an 18 percent required rate of return?
e. Determine the current value of a share of Heller Industries common stock to an investor (with an 18 percent required rate of return) who plans to hold it for six years, assuming that earnings and dividends per share grow at the rate determined in Part a for the next six years and then at 6 percent thereafter.