Problem
Oriole Infotech is a fast-growing communications company. The company did not pay a dividend last year and is not expected to do so for the next two years. Last year the company's growth accelerated, and management expects to grow the business at a rate of 35 percent for the next five years before growth slows to a more stable rate of 6 percent. In the third year, management has forecasted a dividend payment of $1.10. Dividends will grow with the company thereafter.
Calculate the value of the company's stock at the end of its rapid growth period (i.e., at the end of five years). The required rate of return for such stocks is 16 percent.