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] earnings and dividend per share are $4 and $2, respectively.
[A] Calculate 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 if investors require an 18 percent rate of return?
[C] Why might the stock price calculated in [B] not represent an accurate valuation to an investor with an 18 percent required rate of return?