Blossom Inc. has a patent that will expire in two years. The firm is expected to...
Blossom Inc. has a patent that will expire in two years. The
firm is expected to grow at 11.4 percent for the next two years and
dividends will be paid at year end. It just paid a dividend of $1.
After two years, the growth rate will decline to 5.4 percent
immediately, and the firm will grow at this rate forever. If the
required rate of return is 11 percent, value the firm’s current
share price. (Round intermediate calculations to 4
decimal places, e.g.1.1712 and the final answer to 2 decimal
places, e.g. 45.17.)
| Current share price | $_________ ? |
Homework Answers
Share price is equal to the present value of all future dividends
= 1*(1.114)/(1.11) + 1*(1.114)^2/(1.11)^2 + 1*(1.114)^2(1.054)/(1.11)^2(11%-5.4%)
= $20.9681 per share
i.e. $20.97 per share
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