Question:
Currently a firm is earning $3.80 per share (EPS=$3.80)and has a dividend payout ratio of 70% today and in the foreseeable future. Starting next year EPS is expected to grow by 30% for three years and 20% for the next three years. Starting in year seven the EPS growth rate will gradually decline over three years to 8% and stay at 8% thereafter.
What is the most you would be willing to pay for a share if the firm requires an 18.00% rate of return?