ABC Corporation paid $2 per share dividend last year. The company is a supernormal growth and its earnings are expected to grow at a 25 percent rate for the next 3 years, 15% rate over the following 2 years and 5 percent thereafter. Its required rate of return on equity is 10%.
a. What is P0?
b. What are the prices from year 1 to year 5?
c. What is the dividend yield and capital gains yield for each period?
d. Show that the divident yield and capital gains yield are equal to required return and are independent for each periods.