Nonconstant growth: Starskeep, Inc., is a fast growing technology company. The firm projects a rapid growth of 40 percent for the next two years and then a growth rate of 20 percent for the following two years. After that, the firm expects a constant-growth rate of 8 percent. The firm expects to pay its first dividend of $1.25 a year from now. If your required rate of return on such stocks is 20 percent, what is the current price of the stock?

Question

Quizplus · Accepted Answer

The correct answer is A because the current price of the stock is $15.63. This is calculated using the Gordon Growth Model, which takes into account the expected growth rate of the firm and the required rate of return on such stocks.

Nonconstant Growth: Starskeep, Inc