Author Question: One of the arguments that analysts use to justify the high stock valuations for technology firms is ... (Read 22 times)

mspears3 · **on:** Apr 25, 2021

One of the arguments that analysts use to justify the high stock valuations for technology firms is that they are very risky during their start-up years but become less risky as the technology becomes widely adopted. Consider trying to value a company called TechCorp on Jan 1. It pays dividends annually at midnight on Dec 31. The last dividend (yesterday) was $1. Dividends were expected to grow for two years at 10% and then settle down to a long-run growth rate of 5% in perpetuity. Because of the initial riskiness of the company, investors required a 20% rate of return over the first two years, but only a 12% rate of return thereafter. The time line of dividends is as follows. What is a fair price for TechCorp on Jan 1?

◦ $8.70
◦ $12.60
◦ $13.44
◦ $13.52
◦ $14.53

skipfourms123 · **Reply #1 on:** Apr 25, 2021

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