Problem: Inter.com is a highly priced internet stock whose earnings in the coming year (E1) is expected to be $1 per share. Investors expect these earnings to grow at 80% (g) per year for the next 5 years. The growth rate is estimated by assuming that Dotnet reinvests 80% of its earnings (b= 0.8) at a return {R) of 100 % per year. After 5 years of this high growth, competition is expected to sharply reduce the profitability of Dotnet. The forecast is that the company will then retain only 50% of its earnings and invest them at a return of 25% per year. All earnings that are not invested are paid out as dividends. Dotnet investors require a return of 20% per year (k)
1) What is the price per share of Inter.com
2) What is the premium for growth of the stock?
3) What fraction of the premium for growth is due to super growth? (or the initial high growtgh?)
4) What is Inter.com's PE ratio?
5) What return would you earn if you bought the stock today and sold it in year 1?