Alphabet Inc.’s (GOOG) stock is selling for $1,100.00. According to analysts the growth rate for GOOG will be 30% next year, 25% for the following
4 years, 10% for the following two years, and thereafter the growth rate will be 8% indefinitely. Due to its growth, GOOG will not pay a cash
dividend until four years from now. At that time, the dividend per share will be $10.00. Thereafter the dividend will grow by the same rate as the
company. Stockholders require a return of 18 percent on Alphabet’s stock.
a)Based on the above assumptions, determine the price of Alphabet’s common stock.
b)Explain whether an investor should buy the stock.
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