TPP Inc., which owns and operates a chain of tattoo and piercing parlors, was founded 10 years ago. It has been profitable for the last 5 years, but it has needed all of its earnings to support growth and thus has never paid a dividend. Management has indicated it plans to pay $0.32 dividend 2 years from today and hinted it expects the dividend to grow at a relatively rapid rate afterwards for several years. You forecast the dividend will increase at a relatively rapid rate for several years and then grow at a constant rate of 3.0% thereafter, as shown in the table below. Management's credibility with investors is high and it is believed the current price of the stock, $31.75, represents fair value - i.e. - the market price is equal to its intrinsic value, or is in equilibrium. What is the expected rate of return on the common stock? Year Growth Rates 4.40% 012 b. 4.55% c. 5.39% 3 20.00% d. 6.27% 4 17.00% e. 6.34% 5 15.00% 6 10.00% 7 6.50% 8 3.00%

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
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Chapter1: Investments: Background And Issues
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10. TPP Inc., which owns and operates a chain of tattoo and piercing parlors, was founded 10 years ago. It has been
profitable for the last 5 years, but it has needed all of its earnings to support growth and thus has never paid a
dividend. Management has indicated it plans to pay $0.32 dividend 2 years from today and hinted it expects the
dividend to grow at a relatively rapid rate afterwards for several years. You forecast the dividend will increase at
a relatively rapid rate for several years and then grow at a constant rate of 3.0% thereafter, as shown in the table
below. Management's credibility with investors is high and it is believed the current price of the stock, $31.75,
represents fair value - i.e. - the market price is equal to its intrinsic value, or is in equilibrium. What is the
expected rate of return on the common stock?
Year
Growth
Rates
a. 4.40%
0 1 2
b. 4.55%
c. 5.39%
3
20.00%
d. 6.27%
4
17.00%
e. 6.34%
5
15.00%
6
10.00%
7
6.50%
8
3.00%
Transcribed Image Text:10. TPP Inc., which owns and operates a chain of tattoo and piercing parlors, was founded 10 years ago. It has been profitable for the last 5 years, but it has needed all of its earnings to support growth and thus has never paid a dividend. Management has indicated it plans to pay $0.32 dividend 2 years from today and hinted it expects the dividend to grow at a relatively rapid rate afterwards for several years. You forecast the dividend will increase at a relatively rapid rate for several years and then grow at a constant rate of 3.0% thereafter, as shown in the table below. Management's credibility with investors is high and it is believed the current price of the stock, $31.75, represents fair value - i.e. - the market price is equal to its intrinsic value, or is in equilibrium. What is the expected rate of return on the common stock? Year Growth Rates a. 4.40% 0 1 2 b. 4.55% c. 5.39% 3 20.00% d. 6.27% 4 17.00% e. 6.34% 5 15.00% 6 10.00% 7 6.50% 8 3.00%
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