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Question
The Hart Mountain Company has recently discovered a new type of kitty litter which is extremely absorbent. It is expected that the firm will experience (beginning now) an unusually high growth rate (20 percent) during the period (3 years) it has exclusive rights to the property where the raw material used to make this kitty litter is found. However, beginning with the fourth year the firm's competition will have access to the material, and from that time on the firm will achieve a normal growth rate of 8 percent annually. During the rapid growth period, the firm's dividend payout ratio (percent of EPS paid as dividends) will be relatively low (20 percent) in order to conserve funds for reinvestment. However, the decrease in growth in the fourth year will be accompanied by an increase in dividend payout to 50 percent. Last year's earnings were E0 = $2.00 per share, and the firm's required return is 10 percent. What should be the current price of the common stock?
a. $66.50
b. $87.96
c. $71.53
d. $78
e. $93.50
Answer
This answer is hidden. It contains 234 characters.
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