Question

Problem 7-12
Nonconstant Growth Stock Valuation

Assume that the average firm in your company's industry is expected to grow at a constant rate of 7% and that its dividend yield is 5%. Your company is about as risky as the average firm in the industry and just paid a dividend (D0) of $3. You expect that the growth rate of dividends will be 50% during the first year (g0,1 = 50%) and 25% during the second year (g1,2 = 25%). After Year 2, dividend growth will be constant at 7%. What is the required rate of return on your company’s stock? What is the estimated value per share of your firm’s stock? Do not round intermediate calculations.