46. Aussie Investors Pty Ltd is considering investing in a new biotech company. The biotech company...
46. Aussie Investors Pty Ltd is considering investing in a new biotech company. The biotech company has indicated that the first dividend payment will be at the end of Year 4. This maiden dividend will be $5.00 per share and is forecast to grow at 8% per year for the foreseeable future. Aussie Investors requires a rate of return of 25% on this risky investment. What is the maximum price that Aussie Investors will pay for this share?
Homework Answers
value of stock = Present value of dividends + Horizontal value
Horizontal value = dividend next year/(Required return - growth rate)
=>
horizontal value at year 3 = 5/(0.25-0.08)
= 29.4117647059
maximum price per share = 29.4117647059/1.25^3
= 15.06
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