Highland Pet Supplies Company forecasts earnings per share of $2 50 during the coming year Highland has always paid a dividend equal to 40 percent of its earnings, and it anticipates continuing this practice Earnings are expected to increase at a rate of 20 percent per year in years 2 and 3, 15 per...

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Highland Pet Supplies Company forecasts earnings per share of $2.50 during the coming year. Highland has always

Question:

Highland Pet Supplies Company forecasts earnings per share of $2.50 during the coming year. Highland has always paid a equal to 40 percent of its earnings, and it anticipates continuing this practice. Earnings are expected to increase at a rate of 20 percent per year in years 2 and 3, 15 percent in year 4, and 6 percent per year thereafter. The beta of Highland stock is 1.5, the risk-free rate is 7 percent, and the market risk premium has been estimated to be 8 percent.
a. What is the current (time 0) value of a share of Highland stock?
b. What value would you project for a share of stock at the beginning of year 3?

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...