Better Mousetraps has come out with an improved product, and the world is beating a path to

Question:

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 in1 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%

Discount Rate
Depending upon the context, the discount rate has two different definitions and usages. First, the discount rate refers to the interest rate charged to the commercial banks and other financial institutions for the loans they take from the Federal... Dividend
A dividend is a distribution of a portion of company’s earnings, decided and managed by the company’s board of directors, and paid to the shareholders. Dividends are given on the shares. It is a token reward paid to the shareholders for their...