AnswerKey:

P = $9.44

Question:

Analysts project that the Dutton Corporation will end the year with an EPS of $1.00. The firm is expected to have two periods of high growth before it slides into a stable terminal growth rate as outlined in the table below. Initially, the firm retains a high percentage of earnings, as noted by the plowback ratio, but then declines in two steps to a steady state value.

• Using a multi-stage growth model and a required rate of return of 13%, what is the value of a share of this company's stock?

Phase	Duration in years	Growth Rate	Plowback Ratio
1	5	16%	70%
2	4	11%	55%
3	Perpetual	4%	40%

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Q8.

AnswerKey:

a) P = $12.50

b) P = $34.21

c) P = $9.17

Question:

Consider the following three stocks. a. Stock Alpha is expected to pay a dividend of $1.50 per share forever - no growth or decline. b. Stock Beta will pay a dividend of $3.25 next year. Dividends are expected to grow at 2.5% per year forever. c. Stock Delta is recovering from several years of poor financial results, during which its dividend was cut to $0.25 per year. After a significant restructuring, the company is expected to increase dividends by $.25 per year for four years (DIV1 = $0.50, DIV2 = $0.75, DIV3 = $1.00, DIV4 = $1.25). Thereafter dividends are not expected to grow or decline.

• What is the value of each stock, assuming the cost of capital is 12%?