Worldwide Inc.,a large conglomerate,has decided to acquire another firm.Analysts are forecasting a period (2 years)of extraordinary growth (20%),followed by another 2 years of unusual growth (10 %),and finally a normal (sustainable)growth rate of 6% annually.If the last dividend was D(0)= $1.00 per share and the required rate is 8%,what should the market price be today?

Question

Quizplus · Accepted Answer

Step 1 - Calculate the present value of the extraordinary-growth cash flows.
PV = 11ea7fdb_fbf4_52d5_a768_2b9bd9f65f6a_TB2902_11 = $1.11
PV = 11ea7fdb_fbf4_52d6_a768_af1f09b13d2c_TB2902_11 = $1.23
Step 2 - Calculate the present value of the unusual-growth cash flows.
PV = 11ea7fdb_fbf4_52d7_a768_7b27403cc995_TB2902_11 = $1.26
PV = 11ea7fdb_fbf4_52d8_a768_99b384a302f6_TB2902_11 = $1.28
Step 3 - Calculate the value of the constant-growth cash flows and discount it back to today. 11ea7fdb_fbf4_52d9_a768_a599c294b276_TB2902_11 = 11ea7fdb_fbf4_79ea_a768_4b96aafa3912_TB2902_11 11ea7fdb_fbf4_79eb_a768_db01d0ba1f89_TB2902_11 = 11ea7fdb_fbf4_79ec_a768_f96a14426de1_TB2902_11 = $92.35
PV = 11ea7fdb_fbf4_79ed_a768_fdcfea59c9f1_TB2902_11 = $67.88
Step 4 - Add the present values together to get the current stock price.
1.11 + 1.23 + 1.26 + 1.28 + 67.88 = $72.76