Problem:
New Gadgets is growing at a very fast pace. As a result, the company expects to pay annual dividends of $0.55, 0.80, and $1.10 per share over the next three years, respectively. After that, the dividend is projected to increase by 5 percent annually. The last annual dividend the firm paid was $0.40 a share.
Required:
Question: What is the current value of this stock if the required return is 16 percent?
Note: Provide support for your underlying principle.