Nonconstant Growth Stock Valuation

Nonconstant Growth Stock Valuation

Assume that the average firm in your company’s industry is expected to grow at a constant rate of 6% and that its dividend yield is 7%. Your company is about as risky as the average firm in the industry, but it has just successfully completed some R&D work that leads you to expect that its earnings and dividends will grow at a rate of 50% [D1 = D0 (1+g) = D0 (1.50)] this year and 25% the following year, after which growth should match the 6% industry average. The last dividend paid (D0) was $1. What is the value per share of your firm’s stock?

Price: £ 45

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