What is the current value of one share of this stock

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Reference no: EM133270188

Question - Cellular Talk is a new firm in a rapidly growing industry. The company is planning on increasing its annual dividend by 25% a year for the next three years and then decreasing the growth rate to 6% per year. The company just paid its annual dividend in the amount of $0.80 per share.

a) What is the current value of one share of this stock if the required rate of return is 17%?

b) Given the risks of this industry, you have decided to increase the required rate of return to 25% and to hold all the other inputs at their original values. Recalculate the intrinsic value of the stock under this new assumption.

c) Cellular Talk shares are trading at $32.43. Assuming that you are comfortable with the required rate of return of 25% and the input assumptions stated above for all the other variables, what does the market price tell you about the market's expectation for the number of years at which dividends will grow at 25% before the growth rate reduces to 6%? Explain in a sentence or two. No calculations are required for part c).

d) Assuming the scenario described in part c., calculate the number of years that the market expects dividends will grow at 25% before the growth rate reduces to 6%.

e) Based on your analysis is this stock a buy, hold or sell? Explain in one or two sentences.

Reference no: EM133270188

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