How would you advise clients about Softek stock as an investment under the following conditions? Give reasons for your advice. (No calculations.)
a. Softek is currently selling at a price very near that calculated in part (a) of Problem 11.
b. It is selling near the price calculated in Problem 12.
c. It is selling at a price slightly above that calculated in part (b) of Problem 11.
A leader in the computer software field. Softek has two potentially big-selling products under development. Alpha, the first new product, seems very likely to catch on and is expected to drive the firm’s growth rate to 25% for the next two years. However, software products have short lives, and growth can be expected to return to a more normal rate of 6% after that period if something new isn’t launched immediately. Beta, the second product, is a logical follow-on, but management isn’t as confident about its success as it is about Alpha’s. Softek’s most recent yearly dividend was $4, and firms in the industry typically return 14% on stockholder investments.