Solved: The Blinkelman Corporation has just announced

that it plans to

The Blinkelman Corporation has just announced that it plans to introduce a new solar panel that
will greatly reduce the cost of solar energy. As a result, analysts now expect the company’s
earnings, currently (year 0) $1 per share to grow by 50 percent per year for the next three years,
by 25 percent per year for the following three years, and by 8 percent per year, thereafter.
Blinkelman does not currently pay a dividend, but it expects to pay out 20 percent of its earnings
beginning two years from now. The payout ratio is expected to become 50 percent in five years
and to remain at that level. The company’s marginal tax rate is 40 percent. If you require a 20
percent rate of return on a stock such as this, how much would you be willing to pay for it
today? 23. Watkins, Inc., has experienced an explosion in demand for its ram football novelties.
The firm currently (time 0) pays a dividend of $0.50 per share. This dividend is expected to
increase to $1.00 per share one year from now. It is expected to grow at a rate of 20 percent
per year for the next seven years. Susan seeks your advice regarding the current value of this
stock. Susan plans to purchase this stock today, if the price is right, and to hold it for three
years. She believes that the stock will increase in value to $40 at the end of five years. What is
the current value of this stock to Susan if she requires a 20 percent rate of return on stocks of
this risk level?

The Blinkelman Corporation has just announced that it plans to

ANSWER
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