Hair Re-Growth Company has developed a new product and is selling its product as fast it can be produced. As a result, the company is predicting growth of 20% per year for the next four years. After four years, competitors will produce the same product, and profits will stabilize. It is predicted that the sustainable growth rate after five years will be 5%. Most recently, the dividend paid at the end of last year was $1 per share.
Required:
1. What is the expected dividend each year for the next four years?
2. What is the expected stock price four years from now? Assume a discount rate of 10%.
3. What is the stock’s price today?
4. What is the dividend yield of this stock?
5. What is next year’s stock price predicted to be?
6. What is the expected rate of return to an investor who purchases this stock and expects to sell it in one year?
7. As a financial adviser newly aware of this security, describe the type of client you would suggest invest in it. Provide reasons to support your conclusion.