The Blinkelman Corporation has just announced that it plans to introduce a new solar panel that will greatly reduce the cost of solar energy. As a result, analysts now expect the company's earnings, currently (year 0) $1 per share to grow by 50 percent per year for the next three years, by 25 percent per year for the following three years, and by 8 percent per year, thereafter.
Blinkelman does not currently pay a dividend, but it expects to pay out 20 percent of its earnings beginning two years from now. The payout ratio is expected to become 50 percent in five years and to remain at that level.
The company's marginal tax rate is 40 percent. If you require a 20 percent rate of return on a stock such as this, how much would you be willing to pay for it today?