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1) Over the past 5 years, the dividends of the Gamma Corporation have grown from $0.70 per share to the current level of $1.30 per share. This growth rate is expected to continue for the foreseeable future. What is the value of a share of Gamma Corporation common stock to an investor who requires a 20 percent on an investment?
2) The chairman of Heller industries told a meeting of financial analysts that he expects the firm’s earnings and dividends to double over the next 6 years. The firm’s current (that is, as of year 0) earnings and dividends per share are $4 and $2.
a. Estimate the compound annual dividend growth rate over the 6-year period.
b. Assuming the forecasted growth rate will go on forever, how much is this stock worth today if investors require an 18% rate of return?
c. Why might the stock price calculated in not represent an accurate valuation to an investor with an 18% required rate of return?