Beachmaster Suntan Oil’s dividend is expected to grow at a 20% rate each of the next 2 years. After that, dividend growth is expected to normalize at about 8.5% annually. Beachmaster just paid a $2.25 annual dividend per share. The require rate of the return of the stock is 10%.
1. Draw the time line of the stock’s CFs?
2. What is the forecasted dividend for each of the next 2 years (D1 and D2)?
3. What is the forecasted dividend 3 years from now?
4. At what price do you foresee Beachmaster’s stock selling 2 years from now (what is your forecasted P2)?
5. What are the present values of D1, D2, and P2?
6. What is your estimated stock price today?