Question: Better Mousetraps has come out with an improved product and

Better Mousetraps has come out with an improved product, and the world is beating a path to
its door. As a result, the firm projects growth of 20% per year for 4 years. By then, other firms
will have copycat technology, competition will drive down profit margins, and the sustainable
growth rate will fall to 5%. The most recent annual dividend was DIV0 = 1 per share.
a. What are the expected values of DIV1 , DIV2 , DIV3 , and DIV4 ?
b. What is the expected stock price 4 years from now? The discount rate is 10%.
c. What is the stock price today?
d. Find the dividend yield, DIV1 / P0 .
e. What will next year’s stock price, P1, be?
f. What is the expected rate of return to an investor who buys the stock now and sells it in 1 year?
Projected growth...... 20.00%
Time ........ $4.00 years
Sustainable growth rate... 5.00%
Annual dividend (DIV 0)... 0 $1.00 \per share
Discount rate (b)...... 10.00%

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  • CreatedSeptember 19, 2013
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