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

The market price today is calculated using the dividend discount model with varying growth rates. The price is the present value of dividends during extraordinary and unusual growth periods plus the present value of the stock price at the beginning of the normal growth period.