Reference no: EM132620945

Problem 1: Firm X just paid a dividend of $2.50 today. Suppose that the firm's dividend is expected to grow at a rate of 18 percent per year for the next three years. After that, dividend growth is expected to slow to 3 percent per year and remain at that level into the foreseeable future. If Firm X's required return on equity is 11 percent, what is the price of Firm X's stock at the end of year 3.

Note: P3 = Div4/(r - g)

Choose one and explain why:

a) $52.88

(b) $48.24

(c) $36.88

(d) $83.23

Problem 2: Firm X just paid a dividend of $2.50 today. Suppose that the firm's dividend is expected to grow at a rate of 18 percent per year for the next three years. After that, dividend growth is expected to slow to 3 percent per year and remain at that level into the foreseeable future. If Firm X's required return on equity is 11 percent, estimate the intrinsic value of Firm X's common shares today based on the two-stage growth model.

Choose one and explain why:

(a) $47.15

(b) $50

(c) $62.12

(d) $39.36