Fitzpatrick Novelties, an edgy producer of sportswear, has been experiencing a period of tremendous growth.Fitzpatrick does not currently pay any dividends, preferring instead to reinvest all earnings in support of the future growth opportunities.Security analysts anticipate that the company will start paying a dividend of $2 per share at the end of year 4, and that dividend is expected to grow at 10 percent per annum for the next 8 years.A consensus of security analysts believes that the stock price of Fitzpatrick Novelties will be $70 by the end of year 6.

If you require a 16% rate of return on the stock of Fitzpatrick, how much would you be willing to pay for a share of Fitzpatrick today?

Answer rating: 100% (QA)

To calculate the present value of the expected dividends and the stock price at the end of year 6 we ... View the full answer