Question

Next year Dillon Mechanical Inc.'s EPS is expected to be $2. The firm is not expected to pay any dividends for the next four years. In year 5, a dividend of $1 is expected and subsequent dividends are expected to grow at 5 percent per year. Another firm’s (Sterling Inc.'s) next-year EPS is expected to be $5. Sterling has just paid a dividend of $5 (cheques were mailed out today). Its dividends are expected to grow at 1 percent per year. Assume that the cost of capital for both firms is 15 percent.
a. What should be the current share price of Dillon Mechanical Inc.?
b. What should be the current share price of Sterling Inc.?
c. What is the PVGO of Dillon Mechanical?
d. What is the PVGO of Sterling?



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  • CreatedFebruary 25, 2015
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