A Financial Analyst Has Been Following Fast Start Inc

question 92

Multiple Choice

A financial analyst has been following Fast Start Inc. ,a new high-growth company.She estimates that the current risk-free rate is 6.25 percent,the market risk premium is 5 percent,and that Fast Start's beta is 1.75.The current earnings per share (EPS₀) is $2.50.The company has a 40 percent payout ratio.The analyst estimates that the company's dividend will grow at a rate of 25 percent this year,20 percent next year,and 15 percent the following year.After three years the dividend is expected to grow at a constant rate of 7 percent a year.The company is expected to maintain its current payout ratio.The analyst believes that the stock is fairly priced.What is the current price of the stock?

• A) $16.51
• B) $17.33
• C) $18.53
• D) $19.25
• E) $19.89

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Definitions:

Internalized

Describes a process or value that has been incorporated within an individual's psychological framework and is reflected in their behavior or decision-making.

Equilibrium Quantity

The quantity of goods or services traded in a market at the equilibrium price, where the quantity supplied equals the quantity demanded.

External Cost

A cost borne by someone who does not participate in the transaction or decision that led to the cost, often associated with negative externalities.

Total Surplus

The sum of consumer and producer surplus in a market, indicating the overall economic benefit to society from market transactions.