Response to the following problem:
This year, Southwest Light and Gas (SL&G) paid its shareholders an annual dividend of $3 a share. A major brokerage firm recently put out a report on SL&G stating that, in its opinion, the company's annual dividends should grow at the rate of 10% per year for each of the next five years and then level off and grow at the rate of 6% a year thereafter
a. Use the variable-growth DVM and a required rate of return of 12% to find the maximum price you should be willing to pay for this share.
b. Redo the SL&G problem in part a, this time assuming that after year 5, dividends stop growing altogether (for year 6 and beyond, ). Use all the other information given to find the share's intrinsic value.
c. Contrast your two answers and comment on your findings. How important is growth to this valuation model?