The chairman of Heller Industries told a meeting of financial analysts that he expects the firm’s earnings and dividends to double over the next 6 years. The firm’s current (that is, as of year 0) earnings and dividends per share are $4 and $2, respectively.
a. Estimate the compound annual dividend growth rate over the 6-year period (to the nearest whole percent).
b. Forecast Heller’s earnings and dividends per share for each of the next 6 years, assuming that they grow at the rate determined in Part a.
c. Based on the constant growth dividend valuation model, determine the current value of a share of Heller Industries common stock to an investor who requires an 18 percent rate of return.
d. Why might the stock price calculated in part c not represent an accurate valuation to an investor with an 18 percent required rate of return?
e. Determine the current value of a share of Heller Industries common stock to an investor (with an 18 percent required rate of return) who plans to hold it for 6 years, assuming that earnings and dividends per share grow at the rate determined in part a for the next 6 years and then at 6 percent thereafter.
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