The Amazing Video Co. has just paid an annual dividend of 40 cents. You forecast that for the next five years dividends will grow at the rate of 25% a year over the period. From year five on, you expect the growth rate to fall to the industry average of 8% and to remain at this level forever after.
a) Draw the time line showing the dividends per share of this stock for years 1 through 6.
b) If the expected rate of return for this stock is 15%, calculate its price.