Worldwide Inc., a large conglomerate, has decided to acquire another firm.Analysts are forecasting a period (2 years) of extraordinary growth (20 percent), followed by another 2 years of unusual growth (10 percent), and finally a normal (sustainable) growth rate of 6 percent annually.If the last dividend was D0 = $1.00 per share and the required return is 8 percent, what should the market price be today?

Question

Quizplus · Accepted Answer

To find the market price today, we use the dividend discount model (DDM) with varying growth rates. Calculate the dividends for each period of growth and then discount them back to the present value using the required return of 8%. After the extraordinary and unusual growth periods, calculate the terminal value using the Gordon Growth Model for the normal growth period and discount it back to the present value. Sum all present values to find the market price. The correct calculation results in approximately $72.76.