A company just paid a dvidend of $3 per share. The company is in a very profitable growth mode and expects that its dividend will grow 10% annually over the next 4 years. The company has told investors that after the 4th year, it expects the annual dividend to grow at a 2% rate per year. Currently, the risk free rate is 2.5%, the market risk premium is 6.5%, and their beta is 0.8.
1) How much are you willing to pay for their stock today?
2) If you buy their stock today, how much will you be able to sell it for at the end of year 5?
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