Problem
Minish inc expects to have earnings this coming year of $6 million. The firm plans to retain all its earnings for the next three years. For the subsequent two years, the firm will retain 40% of its earnings. It will retain 20% of its earnings from that point onward. Each year, the retained earnings will be invested in new projects with an expected return of 25% per year. All earnings that are not retained will be paid out as dividends. Assume the firms share count reamins constant and all earning growth comes from the investment of retained earnings.
(i) If the cost of capital of the firm is 8% what is the firm's current stock price?
(ii) What is its stock price at year 1?