2. Ultimate Electric, Inc. has just developed a solar panelcapable of generating 200 percent more electricity than any solarpanel currently on the market. As a result, Ultimate is expected toexperience a 15 percent annual growth rate for the next five years.When the five-year period ends, other firms will have developedcomparable technology, and Ultimate’s growth rate will slow to 5percent per year indefinitely. Stockholders require a return of 12percent on Ultimate’s stock. The firm’s most recent annual dividend(D0), which was paid yesterday, was $1.75 per share.
a. Calculate the value of the stock today.
b. Calculate the dividend yield, Dˆ1 /P0, the expected capitalgains yield, and the expected total return (dividend yield pluscapital gains yield) for this year. Calculate these same threeyields for Year 5.
c. Suppose your boss believes that Ultimate’s annual growth ratewill be only 12 percent during the next five years and that thefirm’s normal growth rate will be only 4 percent. Under theseconditions, what is the price of Ultimate’s stock?
d. Suppose your boss regards Ultimate as being quite risky andbelieves that the required rate of return should be higher than the12 percent originally specified. Rework the problem under theconditions originally given, except change the required rate ofreturn to (1) 13 percent, (2) 15 percent, and (3) 20 percent todetermine the effects of the higher required rates of return onUltimate’s stock price.
