Question: A financial analyst has been following Fast Start Inc. a new high growth firm. She estimates that the current risk-free rate is 6.25%, the market risk premium is 5%, and that Fast Start's beta is 1.75. The current earnings per share (EPS0) are $2.50. The firm has a 40% payout ratio. The analyst estimates that the firm's dividend will grow at a rate of 25% this year, 20% next year, and 15% be following year. After three (3) years, the dividend is expected to grow at a constant rate of 7% a year. The firm is expected to maintain its current payout ratio. The analyst believes that the stock is fairly priced. Calculate the current price of the stock?
[A] Determine the expected dividend yield & capital gain yield once Fast Start Inc.'s period of supernormal growth ends.
[B] Find interest to investors is the changing relationship between dividend yield and capital gain yield over time?