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On March 10, International Copy Machines (ICOM), one of the “favorites” of the stock market, was priced at $300 per share. This price was based on an expected annual growth rate of at least 20 percent for quite some time in the future. In July, economic indicators turned down, and investors revised downward to 15 percent their estimate for growth of ICOM. What should happen to the price of the stock? Assume the following:
a. A perpetual-growth valuation model is a reasonable representation of the way the market values ICOM.
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Order Paper Nowb. The firm does not change its dividend, the risk complexion of its assets, or its degree of financial leverage.
c. The dividend next year will be $3 per share.
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