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WAW is an established company operating in a rapidly growing market. Its earnings per share this year (at time 1) are expected to be $1.90. These earnings are currently growing at 15% per year. After this year, this growth rate of earnings is expected to continue for four more years (years 2, 3, 4, and 5). To support the earnings growth, the firm will retain much of its earnings. At time 1 and time 2, the firm expects to payout 10% of its earnings as dividends. Then, beginning at time 3, the payout ratio will increase to 20% of earnings and remain at this level through time 5. Beginning at time 6, it is expected that the payout ratio of the company will be 0.50. This payout ratio is expected to remain constant forever. The time 6 earnings are expected to be 8% higher than the earnings at time 5. WAW expects this 8% growth rate of earnings to continue forever. Given its risk, the required rate of return for this company is 13% p.a.
a. What is the current value of a share of WAW stock?
b. What fraction of the current value of WAW can be attributed to the present value of growth opportunities?
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