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Ch8_P2sol - b Suppose now that you believe that the...

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Chapter 8, Problem 2 Solution 2. As an analyst at Churnem & Burnem Securities, you are responsible for making recommendations to your firm’s clients regarding common stocks. After gathering data on Denver Semiconductors, you have found that its dividend has been growing at a rate of 8% per year to the current (D 0 ) $1.25 per share. The stock is now selling for $24 per share, and you believe that an appropriate rate of return for this stock is 15% per year. a. If you expect that the dividend will grow at an 8% rate into the foreseeable future, what is the highest price at which you would recommend purchasing this stock to your clients?
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Unformatted text preview: b. Suppose now that you believe that the company’s new product line will cause much higher growth in the near future. Your new estimate is for a three-year period of 20% annual growth to be followed by a return to the historical 8% growth rate. Under these new assumptions, what is the value of the stock using the two-stage dividend growth model? c. You now realize that it is likely that the growth will transition from 20% down to 8% gradually, rather than instantaneously. If you believe that this transition will take five years, what is the value of the stock today? Use the three-stage growth model. Worksheet: Formulas:...
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