Ten years ago, Video Toys began manufacturing and selling coin-operated arcade games. Dividends are currently $1.50 per share, having grown at a 15 percent compound annual rate over the past five years.
That growth rate is expected to be maintained for the next three years, after which dividends are expected to grow at half that rate for three years.
Beyond that time, Video Toys's dividends are expected to grow at 5 percent per year. What is the current value of a share of Video Toys common stock if your required rate of return is 18 percent?