Question

Eddie is thinking about investing in stocks of IDK Inc. IDK just announced its earnings per...

Eddie is thinking about investing in stocks of IDK Inc. IDK just announced its earnings per share

of $6 today, but the company currently pays no dividends. The earnings are expected to grow at

12% per year for the following three years. After that, the earnings will grow at 8% per year for

five years and then slow down to 2% forever. IDK plans to pay its first annual dividend at the end

of Year 4 by distributing 50% of its earnings to shareholders, and the company does not plan to

change its payout policy in the foreseeable future. How much is Eddie willing to pay for a share

of IDK if the discount rate is 12% (EAR)

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Answer #1

Answer:

Eddie will be willing to pay for a share of IDK = $38.98

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