Calculate the expected price

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As an analyst for Flint Inc., you are responsible for many firms, including ADFC. Currently you have a "hold" recommendation on ADFC. The current price of ADFC is $151. You have conducted an extensive analysis of the industry and you feel that the probability the firm will capture a substantial share of the new market is 30 percent. If the firm is able to capture the new market, you are expecting earnings to grow at a rate of 45 percent per year for the next five years. In that case, the stock price would rise to $231 due to the unusually high growth rate of future earnings. However, you feel there is a 35-percent probability that the firm will face serious difficulties in the near future, in which case the stock price will fall to $111, and the earnings growth rate will drop to 3 percent. There is a 35-percent chance that nothing will change for the firm and its earnings growth rate will remain at 12 percent.

Calculate the expected price.

Reference no: EM133121324

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