Problem
Assume that Bon Temps is a constant growth company whose last dividend (d0, which was paid yesterday) was $2.00 and whose dividend is expected to grow indefinitely at a 6 percent rate. The appropriate rate of return for Bon Temps' stock is 16 percent.
A. What is the firm's expected dividend stream over the next three years?
B. What is the firm's current stock price?
C. What is the stock's expected value one year from now?
D. What are the expected dividend yield, the capital gains yield, and the total return during the first year?
• Assume that the stock is currently selling at $21.20. What is the expected rate of return on the stock?
• Assume that bon temps is expected to experience supernormal growth of 30 percent for the next three years then to return to its long-run constant growth rate of 6 percent. What is the stock's value under these conditions? What is its expected dividend yield and capital gains yield in year 1? In year 4?