Question

Problem 9.24 Management of Cullumber, a biotech firm, forecasted the following growth rates for the next three years: 35 percent, 28 percent, and 22 percent. Management then expects the company to grow at a constant rate of 9 percent forever. The company paid a dividend of $1.40 last week. If the required rate of return is 15 percent, what is the value of this stock? (Round intermediate calculations and final answer to 2 decimal places, e.g. 15.20.) Value of stock $ Open Show Work Click if you would like to Show Work for this question:

Answer 1

value of stock = Present value of dividends + Horizontal value

Horizontal value = dividend next year/(Required return - growth rate)

=>

horizontal value = 1.4 * 1.35 * 1.28 * 1.22 * 1.09/(0.15 - 0.09)

= 53.617536

value = 1.4 * 1.35/1.15 + 1.4 * 1.35*1.28/1.15^2 + 1.4*1.35*1.28*1.22/1.15^3 + 53.617536/1.15^3

= 40.67