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?

EBK CONTEMPORARY FINANCIAL MANAGEMENT
14th Edition
ISBN:9781337514835
Author:MOYER
Publisher:MOYER
Chapter7: Common Stock: Characteristics, Valuation, And Issuance
Section: Chapter Questions
Problem 22P
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Consider this scenario: 

  1. 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: 

  1. 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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