Innovative Group Ltd, an IT company, is undertaking a new project to develop software for Fair Supermarkets. As such, it is expected that the company has an ROE of 24% and a plowback ratio of 0.30. The forecasted earnings of the company for the first year from now are $2 per share. Investors expect a 12% rate of return on the company’s stock. a.Calculate the price at which this company’s stock should sell using the constant-growth dividend discount model.       Your valuation in part (a) is based on the new project undertaken by the company to develop software for Fair Supermarkets. However, recent developments have informed you that the company will not be able to continue to do this project for Fair Supermarkets. Based on this new information you have revised your estimates regarding the company’s prospect and forecasted that the company’s dividend is $0.50 per share for the first year from now and $1.00 per share for the second and third years from now. After that the company’s dividend will grow at a constant rate of 6% per annum permanently.   What is the price at which this company’s stock should sell based on these new inputs according to the two-stage dividend discount model?

Essentials Of Investments
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ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
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Chapter1: Investments: Background And Issues
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Innovative Group Ltd, an IT company, is undertaking a new project to develop software for Fair Supermarkets. As such, it is expected that the company has an ROE of 24% and a plowback ratio of 0.30. The forecasted earnings of the company for the first year from now are $2 per share. Investors expect a 12% rate of return on the company’s stock.

a.Calculate the price at which this company’s stock should sell using the constant-growth dividend discount model.    

 

Your valuation in part (a) is based on the new project undertaken by the company to develop software for Fair Supermarkets. However, recent developments have informed you that the company will not be able to continue to do this project for Fair Supermarkets. Based on this new information you have revised your estimates regarding the company’s prospect and forecasted that the company’s dividend is $0.50 per share for the first year from now and $1.00 per share for the second and third years from now. After that the company’s dividend will grow at a constant rate of 6% per annum permanently.

 

What is the price at which this company’s stock should sell based on these new inputs according to the two-stage dividend discount model?       

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