Biogenetics, Inc. plans to retain and reinvest all of its earnings for the next 30 years. Beginning in year 31, the firm will begin to pay a $12 per share dividend. The dividend will increase at a 6% rate annually thereafter. Given a required return of 15%, what the stock should sell for today?

Question

Quizplus · Accepted Answer

The stock price today is the present value of the dividends starting in year 31. The dividend in year 31 is $12, growing at 6% annually. The price at year 30 is calculated using the Gordon Growth Model: P30 = D31 / (r - g) = $12 / (0.15 - 0.06) = $133.33. The present value of this price is then discounted back 30 years: P0 = $133.33 / (1.15)^30 = $2.01.