Consumer Friendly Collections (CFT) has grown at a rate of 30 percent in each of the last five years. This same growth rate is expected to continue for the next three years. After three years, growth will decline to 15 percent, where it will remain for five years; growth will then decline to 5 percent, the rate at which the firm will grow for the remainder of its life. CFT’s beta coefficient is 1.5, the expected market return is 14 percent, and the risk-free rate of return is 6 percent. Currently, the economy is experiencing normal growth, and economists’ projections indicate that this type of economy will continue at least for the next 10 years.
a. Using the Capital Asset Pricing Model, compute the required rate of return for CFT stock.
b. If it just paid a dividend equal to $2.40 per share, what should be the market value of CFT’s stock today?
c. If you suspected the economy was going to enter into a long-term recessionary period one year from now, would you make any adjustments to the expected growth rates given here? Explain why or why not.