Ultimate Electric, Inc. has just developed a solar panel capable of generating 200 percent more

electricity than any solar panel currently on the market. As a result, Ultimate is expected to

experience a 15 percent annual growth rate for the next five years. When the five-year period ends,

other firms will have developed comparable technology, and Ultimate's growth rate will slow to 5

percent per year indefinitely. Stockholders require a return of 12 percent on Ultimate's stock. The

firm's most recent annual dividend (D0), which was paid yesterday, was $1.75 per share.

a. Calculate the value of the stock today.

b. Calculate the dividend yield, D1/P0, the expected capital gains yield, and the expected total

return (dividend yield plus capital gains yield) for this year. Calculate these same three yields

for Year 5.

c. Suppose your boss believes that Ultimate's annual growth rate will be only 12 percent during

the next five years and that the firm's normal growth rate will be only 4 percent. Under these

conditions, what is the price of Ultimate's stock?

d. Suppose your boss regards Ultimate as being quite risky and believes that the required rate of

return should be higher than the 12 percent originally specified. Rework the problem under the

conditions originally given, except change the required rate of return to (1) 13 percent, (2) 15

percent, and (3) 20 percent to determine the effects of the higher required rates of return on

Ultimate's stock price.