Assume you’ve generated the following information about the stock of Bufford’s Burger Barns: The company’s latest dividends of $4 a share are expected to grow to $4.32 next year, to $4.67 the year after that, and to $5.04 in year 3. In addition, the price of the stock is expected to rise from $56.50 (its current price) to $77.75 in 3 years.
a. Use the dividends-and-earnings model and a required return of 15% to find the value of the stock.
b. Use the IRR procedure to find the stock’s expected return.
c. Given that dividends are expected to grow indefinitely at 8%, use a 15% required rate
of return and the dividend valuation model to find the value of the stock.
d. Assume dividends in year 3 actually amount to $5.04, the dividend growth rate stays at 8%, and the required rate of return stays at 15%. Use the dividend valuation model to find the price of the stock at the end of year 3. Do you note any simi-larity between your answer here and the forecasted price of the stock ($77.75) given in the problem? Explain.