Chill Pill Pharmaceuticals is expecting a growth rate of 14% for the next two years due to its new drug.Thereafter it should level to an 8% growth rate.The last dividend paid was $.65 per share.What price should the stock sell for if investors require 12% return.

Question

Quizplus · Accepted Answer

First, we need to calculate the dividend for the next two years using the expected growth rate of 14%:
Dividend next year = $0.65 x (1 + 0.14) = $0.74
Dividend in two years = $0.74 x (1 + 0.14) = $0.84

Then we can calculate the expected stock price in two years using the dividend growth model:
Expected stock price in two years = ($0.84 x (1 + 0.08)) / (0.12 - 0.08) = $26.25

Next, we need to calculate the present value of the expected future stock price and dividends:
PV = $0.74 / (1 + 0.12) + $0.84 / (1 + 0.12)^2 + $26.25 / (1 + 0.12)^2 = $19.47

Therefore, the stock should sell for $19.47.

Chill Pill Pharmaceuticals Is Expecting a Growth Rate of 14