Over the past 10 years, the dividends of Party Time, Inc. have grown at an annual rate of 15 percent. The current (D0) dividend is $3 per share. This dividend is expected to grow to $3.40 next year, then grow at an annual rate of 10 percent for the following 2 years and 6 percent per year thereafter. You require a 15 percent rate of return on this stock.
a. What would you be willing to pay for a share of Party Time stock today?
b. What price would you anticipate the stock selling for at the beginning of year 3?
c. If you anticipated selling the stock at the end of 2 years, how much would you pay for it today?