Considering buying shares in a growth stock

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Problem: You are considering buying shares in a growth stock that you believe will earn $2 per share next year, $4 in the following year and $6 in the third year (with all earnings paid out as dividends). After year 3, it is expected that earnings (and dividends) will grow at a steady 3% per year. After the three years, your firm is similar to other firms that grow at 3% annually and trade at a PE multiple of 10.

a) If the stock is currently trading at $50 per share, would you recommend a buy or sell?

b) If growth was greater than 3% for the stock, would that increase or decrease your desire to buy the stock?

Reference no: EM132484875

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