Company A is growing quickly, with current annual increases of
15% per year in both sales and net income. To fund its
growth, it is reinvesting all of its net income each year in new
productive opportunities (payout ratio = 0). Yesterday, the
firm reported net income of $3.00 per share. This growth is
expected to last for another five years (to the end of year 5 on
the timeline), at which time they will have exploited most of the
available high growth opportunities. The growth rate in net
income will then fall to 7% and the firm will adopt a payout ratio
of 50% with the first dividend paid at time period 6.
If shareholders require a 17% return to hold the firm’s shares,
how much would you expect each share to sell for today?
