Question 2 (25 Marks)

Johnson Ltd. has developed new technet'.gy that has given it a competitive advantage over its competitors. This, it expects will increase.i its profitability until its rivals can develop their own technological answers. The firm thinks that its advantage will last for three years, and estimates that its groMh in profits and dividends v ill be 12% for the first year, 11% for the second and 9% the third year, before decreasing to a constant 5% starting in the fourth year. Cost of capital is expected to be 15%, and its last divide:n was $1.65.

1. What is the stocks terminal vat net
2. What is the current share price (Po)?
3. What is the expected share price: for *he year (Ph)*

(5 marks)

(8 marks)

(6 marks)

4. The preferred stock of Gaper!: Inc. pays an annual dividend of $6.50. What is the price of the preferred stock If the required return is: (6 marks)

1. 6%
2. 8%

c) 10%