Question

Arena Distributors is a new company and currently pays no dividends. The company has just reported earnings of $1.5 per share and its earnings are expected to grow at a 15 percent annual rate over the next four years. Following this four-year high growth period earnings will grow at 5 percent per year forever. Starting at the end of year 5, Arena will distribute 20 percent of the previous year’s earnings in the form of dividends. The required rate of return is 10 percent (EAR). Calculate the value of Arena’s share.

Answer 1

$8.57

Answer 2

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