Mylex Inc has just released an improved version of its popular sporting product and the world is beating a path to its door. As a result, the firm projects growth of 20% per year for the next four years. Competition in the product market is expected to drive down profit margins, and hence the sustainable growth rate will fall to 5% after four years. The most recent (i.e. year 0) earnings were $4 per share. The firm has a dividend payout ratio of 25% and its discount rate is 10%.
i) What is the value of the stock price today?
ii) What is the expected stock price four years from now?
iii) If you decide to hold the stock for one year, at what price can you sell the stock?
iv) If you buy the stock now and sell it in 1 year, what will be your rate of return?