Company XYZ is expected to pay no dividends for the next 10 years (that is, up to, and including Year 10). In year 11, the company will pay a dividend of $0.75. After that, all subsequent dividends will be growing at 5.5% per year forever. Company XYZ has estimated beta of 1.2, and the risk-free rate is supposed to be constant 5% per year forever. Currently, the shares of XYZ trade on the stock exchange for $3.14. Market Risk Premium = 6%. If you work as an investment advisor and
1) Your client owns no XYZ shares – would you recommend your client to buy the shares? Why or why not?
2) Your client owns XYZ shares – would you recommend your client to sell the shares? Why or why not?