The Cremmins Coat Company has recently completed a period of extraordinary growth, due to the popularity of its yellow jackets. Earnings per share have grown at an average compound annual rate of 15 percent, while dividends have grown at a 20 percent annual rate over the past 10 years. The current dividend (D0) rate is $2 per share. Current earnings are $3.25 per share.
Earnings are expected to grow at an annual rate of 15 percent for the next three years and 6 percent per annum thereafter. Dividends are expected to grow by 25 percent during the coming year, by 15 percent per annum for the following two years, and by 6 percent per annum thereafter.
a. What price do you expect the stock to sell for today, if your required rate of return on equity for a firm of this risk level is 16 percent?
b. What price do you expect the stock to sell for at the beginning of year 2?