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