Question 1: A firm has a market opportunity over the next four years that will result in supernormal growth. The firm expects dividends to grow by 35 percent over each of the next two years and 20 percent over YR 3 and YR 4 before returning to a constant growth rate of six percent. The firm just paid a dividend of $2.00 and has a required return of 15 percent. (1) Calculate the expected price of the stock given the above assumptions. (2) Calculate the expected price of the stock at YR 7.
Question 2: A firm has a market opportunity over the next four years that will result in supernormal growth. The firm expects dividends to grow by 35 percent over each of the next two years and decline linearly over YR 3 and YR 4 before returning to a constant growth rate of six percent. The firm just paid a dividend of $2.00 and has a required return of 15 percent. Calculate the expected price of the stock given the above assumptions.