You are a stock analyst in charge of valuing high-technology firms, and you are expected to come out with buy-sell recommendations for your clients. You are currently analyzing a firm called e talk.com that specializes in internet-based communication. You are expecting explosive growth in this area. However, the company is not currently profitable even though you believe it will be in the future. Your projections are that the firm will pay no dividends for the next 3 years. F our years from now, you expect the stock to pay its first dividend of $1 per share. You expect dividends to increase at a rate of 20 percent per year for three years after that. At that point, the industry will start to mature and slow down; dividends will continue to grow but only at a rate of 10 percent per year for the foreseeable future. The stock is priced in the market at $20 per share. Given a required rate of return of 14 percent, what is your estimate of the value of the stock? Should you issue a recommendation to buy or to sell?

Answer rating: 100% (QA)

Part A The value of the share as per Gordon Model Dividend discount Model is the present value of al... View the full answer