You are an investment adviser. One of your clients approaches you for your advice on investing in equity shares of Alpha Company. You have collected the following data:


Earnings per share last year $3.00
Payout ratio 0.40
Return on equity 0.25 from year 1 to 5
Cost of equity capital 0.20

The company plans to increase the payout ratio to 60% after year 5. This payout ratio and the return on equity are expected to prevail till perpetuity.

Required:
Estimate the price of an equity share of this company using an appropriate dividend discount model and advise your client whether they should buy a share of the company.

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