Question: Design Logic is a fast growing company that distributes 20% of its earnings as dividends. An institutional investor plans to hold the company stock for 10 years. The investor seeks 15% rate of return, and expects the stock to be traded at 30 times earnings at the end of 10 years. Current earning is $4/share (E0=4). Earning with grow at a rate of 21% during the first year, and decline by 3% every year during the following 4 years reaching 9% in year 5. The growth rate will continue to be 9% for the remaining 5 years.
a. Use the combined earnings and dividend model to determine the current value of the stock.
b. How much is the growth rate after year 10?