You are an investment analyst for a brokerage firm and have been asked to develop a recommendation about Softek for the firm’s clients. You’ve studied the fundamentals of the industry and the firm, and are now ready to determine what the stock should sell for based on the present value of future cash flows. A leader in the computer software field. Softek has two potentially big-selling products under development. Alpha, the first new product, seems very likely to catch on and is expected to drive the firm’s growth rate to 25% for the next two years. However, software products have short lives, and growth can be expected to return to a more normal rate of 6% after that period if something new isn’t launched immediately. Beta, the second product, is a logical follow-on, but management isn’t as confident about its success as it is about Alpha’s. Softek’s most recent yearly dividend was $4, and firms in the industry typically return 14% on stockholder investments. a. Calculate a value for Softek’s stock assuming product Alpha is successful but Beta isn’t. In other words, assume two years of growth at 25% followed by 6% growth lasting indefinitely. b. Calculate a price assuming Beta is also successful and holds Softek’s growth rate at 25% for two additional years.
