You Have Been Hired as an Analyst by a Noted

Essay

You have been hired as an analyst by a noted security analysis firm and asked to value two stocks.You have been given the following data on the two firms:
$\begin{array}{lc}&\underline{\text { firm } 1}\\\text { required return } & 20 \% \\\text { dividend payout ratio } & 20 \% \\\text { current EPS } & \$ 1 \\\text { return on investment } & 25 \% \\\text { stage of growth } & \text { high }\end{array}$

You estimate that firm 1 will become a stable firm after five years have passed,after which it will have a constant growth rate of 6%,and that firm 1's return on investment will remain unchanged.Value each firm.