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A financial analyst has been ollowing Fast Start nc., a new high-growth company. She estimates that the current risk-free rte is 6.25%, the market risk premium s 5%. and that Fast Starts beta 1s 1.75. The current earnings per share EPS。 $2.50. The company has a 40% payout ratio. The analyst estimates that the companys dividend will w at a rate of 25% this year, 20% next year, and 15% the following year. After three years the dividend is expected to grow at a constant rate of 7% a year. The company is 2 3 pected to maintain its current payout ratio. The analyst believes that the stock is fairly priced. What is the current price of the stock? 10 13 15 16 17

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Current risk free rate , Rf = 6.25% Market risk premium , Rm-Rf-5% Beta of stock 1.75 Required return of stock , RR = Rf+ Beta * (Rm-Rf) = 6.25% + 1.75 * 5% = 15% EPSO-$2.50 Payout ratio-40%-0.40 DPS0-EPSO * 40%-$2.50 * 40%-$1 Growth rate, g 25% , 20% and 15% for the next 3 years. Thereafter 7% per year forever DPS1-DPSO (1+g-S1*(1+ 25%)-$1.25 DPS2-$1.25 * ( 1 + 20%)-$1.5 DPS3-S1.5 (115%)S1.725 DPS4-$1.725 (1+ 7%-$1.84575 Terminal value of stock at the end of Year 3 , P3-D4 / RR-g)-S 1.84575 / (15%-790)-S 1.84575 / 8%-$23.07 1875 Current price of stock, PO Present value of dividends and terminal value of stock -S 1.25 * PVIF(15% , 1) +51.5 * PVIF(15% , 2) + (S1.725+ S23.07 1875) * PV IF(15%, 3) -S1.25 0.8696 S1.5 0.7561S24.796875 * 0.6575 - $18.52509531 $18.53 Per share (Rounded) Ans : S18.53 Per share

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