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: Management of ProCor, 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 $1.75 last week. If the required rate of return is 20 percent, what is the value of this stock?

Respuesta :

Answer:

$21.45

Explanation:

Current year dividend = $1.75

Next year growth rate = 35%

Next year dividend = $1.75 × 135%

                                = $2.36

Value of this stock = D1 ÷ (K-g)

where,

D1 = Next year dividend

k = required return

g = expected growth rate

Therefore,

                               = 2.36 ÷ [(20 - 35)%]

                               = $21.45