Question

As an analyst at Thomas & Hartford Agencies, you are responsible for making recommendations to your...

As an analyst at Thomas & Hartford Agencies, you are responsible for making recommendations to your firm’s clients regarding common stocks. After gathering data on Saint Louis Semiconductors, you have found that its dividend has been growing at a rate of 8% per year to the current (D0) $1.25 per share. You believe that an appropriate rate of return for this stock is 15% per year.

  1. If you expect that the dividend will grow at a 8% rate forever, what is the highest price at which you would recommend purchasing this stock to your clients?
  1. Suppose now that you believe that the company’s new product line will cause much higher growth in the near future. Your new estimate is for a 20% annual growth for the first 3-year period, followed by a 8% growth rate. Using these new assumptions, what is the value of the stock?
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Answer #1

NO INTERMEDIATE ROUNDING IS DONE

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