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The Hart Mountain Company has recently discovered a new type of kitty litter which is extremely absorbent. The company expects to enjoy an unusually high growth rate (25 percent) for two years while it has exclusive rights to the raw material used to make the kitty litter. For the next two years (years 3 and 4), the company projects a 15% growth rate as its competitors begin to offer the product. However, beginning with the fifth year the firm's competition will have complete access to the material, and from that time on the firm will achieve a normal growth rate of 7 percent annually. Last year's dividend D0 = \$1.00 per share and the firm's required return is 15 percent.

Trying to find current price of the common stock?

and the capital gains yield, dividend yield, and total yield in year 1?

Solution Preview

The current price is the present value of all the dividends. Based on the growth rates we get the following dividends

Year Growth Rate Dividends Present Value Total PV
0 1
1 25% 1.25 1.25
2 25% 1.56 1.56
3 15% 1.80 1.80 ...

Solution Summary

The solution explains how to calculate the stock price using two stage dividend discount model

\$2.49