Ultimate Electric, Inc. has just developed a solar panel capable of generating 200% more electricity than any solar panel currently on the market. As a result, Ultimate is expected to experience a 15% annual (nonconstant) growth rate for the next five years (supernormal period). When the five-year period ends, other firms will have developed comparable technology, and Ultimate's growth rate will slow to 5% per year (constant) indefinitely. Stockholders require a return of 12% on Ultimate's stock. The firm's most recent annual dividend (D0), which was paid yesterday, was $1.75 per share. What is the current price (P0) of the stock today? $9.4787 What is the market value (price) at the end of Year 5? $3.0608 Answer this question: Consider the scenario in Question 2 and suppose your boss regards Ultimate as being quite risky; therefore, your boss believes that the required rate of return should be higher than the 12% originally specified. What is the current price of the stock, if the required rate of return is 13%? 15%? 20%? What is the effect of the higher required rates of return on Ultimate's stock price?
Ultimate Electric, Inc. has just developed a solar panel capable of generating 200% more electricity than any solar panel currently on the market. As a result, Ultimate is expected to experience a 15% annual (nonconstant) growth rate for the next five years (supernormal period). When the five-year period ends, other firms will have developed comparable technology, and Ultimate's growth rate will slow to 5% per year (constant) indefinitely. Stockholders require a return of 12% on Ultimate's stock. The firm's most recent annual dividend (D0), which was paid yesterday, was $1.75 per share. What is the current price (P0) of the stock today? $9.4787 What is the market value (price) at the end of Year 5? $3.0608 Answer this question: Consider the scenario in Question 2 and suppose your boss regards Ultimate as being quite risky; therefore, your boss believes that the required rate of return should be higher than the 12% originally specified. What is the current price of the stock, if the required rate of return is 13%? 15%? 20%? What is the effect of the higher required rates of return on Ultimate's stock price?
Chapter7: Common Stock: Characteristics, Valuation, And Issuance
Section: Chapter Questions
Problem 22P
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Question
Consider this scenario:
- Ultimate Electric, Inc. has just developed a solar panel capable of generating 200% more electricity than any solar panel currently on the market. As a result, Ultimate is expected to experience a 15% annual (nonconstant) growth rate for the next five years (supernormal period). When the five-year period ends, other firms will have developed comparable technology, and Ultimate's growth rate will slow to 5% per year (constant) indefinitely. Stockholders require a return of 12% on Ultimate's stock. The firm's most recent annual dividend (D0), which was paid yesterday, was $1.75 per share. What is the current price (P0) of the stock today? $9.4787 What is the market value (price) at the end of Year 5? $3.0608
Answer this question:
- Consider the scenario in Question 2 and suppose your boss regards Ultimate as being quite risky; therefore, your boss believes that the required rate of return should be higher than the 12% originally specified. What is the current price of the stock, if the required rate of return is 13%? 15%? 20%? What is the effect of the higher required
rates of return on Ultimate's stock price?
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