Question: The chairman of Heller Industries told a meeting of financial analysts that he expects the firm’s earnings and dividends to double over the next six years. The firm’s current (that is, as of year 0) earnings and dividends per share are $4 & $2, respectively.
[A] Determine the compound annual dividend growth rate over the 6 year period.
[B] Suppose the forecasted growth rate in [A] will go on forever, how much is this stock worth today it investors require an 18% rate of return?
[C] Why might the stock price calculated in [B] no represent an accurate valuation to an investor with an 18% required rate of return?