What is the expected rate of return to an investor/Managerial Accounting
Better Mousetraps has come out with an improved product, and the world is beating a path to its door. As a result, the firm projects growth of 20% per year for 4 years. By then, other firmswill have copycat technology, competition will drive down profit margins, and the sustainable growth rate will fall to 5%. The most recent annual dividend was DIV0 = 1 per share.
a. What are the expected values of DIV1 , DIV2 , DIV3 , and DIV4 ?
b. What is the expected stock price 4 years from now? The discount rate is 10%.
c. What is the stock price today?
d. Find the dividend yield, DIV1 / P0 .
e. What will next year’s stock price, P1, be?
f. What is the expected rate of return to an investor who buys the stock now and sells it in1 year?
Projected growth……20.00%
Time ……..$4.00 years
Sustainable growth rate…5.00%
Annual dividend (DIV 0)… 0 $1.00 \per share
Discount rate (b)……10.00%
