Spectrum Corporations earnings are expected to grow at 10% per annum over the next 3...
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Spectrum Corporations earnings are expected to grow at 10% per annum over the next 3 years, at 8% per annum over the following 2 years, and thereafter at 6% per annum forever. Spectrum Corporations current earnings per share are $2.00 and its retention ratio of 40% is expected to remain unchanged over the foreseeable future. The required rate of return on stocks in Spectrum Corporations risk class has been estimated at 12% per annum.
(i) Estimate Spectrum Corporations current stock price. Show all your calculations.
(ii) Based on the estimated price in part (i) what constant dividend growth rate is implied by Spectrum Corporations current earnings and payout ratio? Assume that the required rate of return remains unchanged at 12% per annum. Show all your calculations.
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