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Stock Price- Heller Industries

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, respectively.

A. Estimate the compound annual dividend growth rate over the 6-year period.

B. Assuming the forecasted growth rate in (A) will go on forever, how much is this stock worth today if investors require an 18 percent rate of return?

C. Why might the stock price calculated in (B) not represent an accurate valuation to an investor with an 18 percent required rate of return?

Solution Preview

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, respectively.

A. Estimate the compound annual dividend growth rate over the 6-year ...

Solution Summary

The solution calculates stock price using dividend discount model

$2.19