Black Hole Inc (BHI), a telescope manufacturer located in southern California, j
ID: 2749607 • Letter: B
Question
Black Hole Inc (BHI), a telescope manufacturer located in southern California, just reported earnings per share (EPS) today of $2.00 and is expected to grow its earnings by 15% per year for the next three years. After which, their earnings growth will settle down to 5% per year. The CFO of BHI just announced that the firm will never pay a single dividend to any of its shareholders. The management team is fully entrenched and there is no chance of a successful takeover. If investors demand a 12% return, what is the price of BHI's stock?
Explanation / Answer
Price of the stock = $2.00 (1+15%)/(1+12%) + $2.00 * (1+15%)2/(1+12%)2 + $2.00 * (1+15%)3/(1+12%)3 + $2.00 * (1+15%)3 * (1+5%)/[(1+12%)3 * (12%-5%)]
= $38.80
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