This year Shoreline Light and Gas(SL&G) paid its stockholders an annual dividend of $3 a share. A major brokerage firm recently put out a report on SL&G stating that,in its opinion, the company's annual dividends should grow at the rate of 10% per year for each of the next five years and then level off and grow at the rate of 6% a year therafter.
a. use the variable growth DVM and a required rate of return of 12%,to find the minimum price you shhould be willing to pay for this stock.
b. Redo the SL&G problem in part a, this time assuming that after year 5, dividends stop growing altogether (for year 6 and beyond g=0) . Use all other information given to find stocks intrinsic value.
c. contrast your two answers and comment on your findings.How important is growth to this valuation?
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How to do it
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