The chairman of Heller Industries told a meeting of financial analysts which he expects the firm’s earnings and dividends to double over the next 6-years. The firm’s current (that is, as of the year) earnings and dividend per share are $4 and $2, correspondingly.
Predict the compound annual dividend growth rate over the 6-year period.
Supposing the forecasted growth rate in (a) will go on everlastingly, how much is this stock worth nowadays if investors need an 18% rate of return?
Why might the stock price computed in (b) not represent the accurate valuation to an investor with an 18% required rate of return?