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A financial analyst has been following Fast Start Inc., a new high-growth company. She estimates that...

A financial analyst has been following Fast Start Inc., a new high-growth company. She estimates that the current risk-free rate is 6.25%, the market risk premium is 5%, and that Fast Start's beta is 1.75. The current earnings per share (EPS0) is $2.50. The company has a 40% payout ratio. The analyst estimates that the company's dividend will grow 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 expected to maintain its current payout ratio. The analyst believes that the stock is fairly priced. What is the current price of the stock?

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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 DPSO-EPS0 * 40%-$2.50 * 40%-$1 Growth rate, g-25%, 20% and 15% for the next 3 years. . . Thereafter 7% per year forever DPSI-DPS0 * ( 1 +g)-$1 * ( 1 + 2596)-$1.25 DPS2-$1.25 * ( 1 + 20%)-$1.5 DPS3S1.5(1+15%-S1.725 DPS4-$1.725 * ( 1 + 796)-$1.84575 Terminal value of stock at the end of Year 3 , P3 = D4 / (RR-g) = $1.84575/ (15%-7%) = $1.84575/ 8% Current price of stock , PO - Present value of dividends and terminal value of stock $23.07 1875 $1.25 * PVIF(15%. 1) + $1.5 * PVIF(15%, 2) + ($1.725+ S23.07 1875) * PVIF(15%, 3) - S1.25 0.8696S1.5 0.7561 $24.796875 0.6575 - $18.52509531 $18.53 Per share (Rounded) Ans : $18.53 Per share

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