Common Stock Assumption #2: growing perpetuity

You are analyzing another share of XYZ Company common stock for possible purchase. Assume that your analysis has revealed that you expect the UPCOMING dividend to be $25 per share. Dividends are paid semiannually and are expected to grow at a rate of 10% per year into the foreseeable future (i.e., forever). Your required rate of return on this stock is 14% per year, compounded semiannually. Further research reveals that this common stock has a market price of $1100 per share.

A. Draw a time line showing the next four dividends for this common stock.

B. Calculate the value of this common stock based on the required rate of return.

C. Calculate the expected return on this common stock based on the market price.

D. Should you invest in the stock? Why or why not? Be sure to use your results from BOTH parts B and C above.