FINANCE QUESTIONS ON NON-CONSTAT GROWTH
1. Pea Pod Cable Corp. is currently expected to grow by 25% for each of the next three years due to their superior cable television system. However, thereafter growth is expected to level off to 6% annually. Pea Pod just paid a dividend of $1.50. Investors in the system have a required rate of return of 17%. What is the value of Pea Pod stock?
2. The Slash and Burn Corp. has been experiencing some tough times lately. They predict that their growth rate will decline 10% for the next two years, then decline further by 5% in the following two years. After that, the owners are encouraged that their new product line will enhance the bottom line and growth will expand to 16% for two years and then level off to 5% for the foreseeable future. Investors have a required rate of return of 15% and the last dividend paid was $1.50. What would an investor be willing to pay for S/B stock?
3. Great Gobs of Goo Corp. has fallen on hard times. Its management expects to pay no dividends for the next two years. However, in the third year expected dividends will be $1.00 and it is expected to grow at a rate of 3% in the 4th year, 6% in the 5th year and 10% in the 6thyear and thereafter. If the required return for Great Gobs Corp. is 20%, what would be the price of the stock today?
4. Paved Paradise Parking and Transit is experiencing a slump. Their dividends are expected to decline at a rate of 7% for three years. After that, with the new terminal, PPPT expects dividends to increase at a constant rate of 8% for the foreseeable future. PPPT just paid a dividend of $4.00. Investors in PPPT have a required return of 12%. What would an investor be willing to pay for PPPT stock?