Problem 9 35 Supernormal Growth Zweite Pharma is a fast growing drug company Management forecasts that in the next 3 years, the company's dividend growth rates will be 30 percent, 28 percent, and 24 percent respectively Last week it paid a dividend of $1 67 After 3 years, management expects dividend growth to stabilize at a rate of 8 percent The required rate of return is 14 percent a Compute the dividends for each of the next 3 years, and calculate their present value D 0 g 1 g 2 g 3 Required Rate of Return (R) D 1 PV D 1 D 2 PV D 2 D 3 PV D 3 PV of Dividends (years 1 3) b Calculate the price of the stock at the end of year 3, when the firm settles to a constant growth rate Hint Calculate D 4 (expected dividend in year 4) and use the constant growth dividend model to estimate P 3 Constant Growth Rate (g) D 4 P 3 c What is the current price of the stock Hint Find the present value of P 3 and add this amount to the present value of the first three years of dividends PV P 3 Current Price of the Stock (P 0 )

The Answer is in the image, click to view ...

Question: Problem 9.35 Supernormal Growth Zweite Pharma is a fast growing drug company. Management forecasts that in the next 3 years, the company's dividend growth rates

Problem 9.35				Supernormal Growth

Zweite Pharma is a fast growing drug company. Management forecasts that in the next 3 years, the company's dividend growth rates will be 30 percent, 28 percent, and 24 percent respectively. Last week it paid a dividend of $1.67. After 3 years, management expects dividend growth to stabilize at a rate of 8 percent. The required rate of return is 14 percent.



a. Compute the dividends for each of the next 3 years, and calculate their present value.

	D₀ =
	g₁ =
	g₂ =
	g₃ =
	Required Rate of Return (R) =

		D₁ =			PV_D₁ =
		D₂ =			PV_D₂ =
		D₃ =			PV_D₃ =

			PV of Dividends (years 1-3):

b. Calculate the price of the stock at the end of year 3, when the firm settles to a constant growth rate.

Hint: Calculate D₄ (expected dividend in year 4) and use the constant growth dividend model to estimate P₃.

	Constant Growth Rate (g) =
		D₄ =

	P₃ =

c. What is the current price of the stock?

Hint: Find the present value of P₃ and add this amount to the present value of the first three years of dividends.

		PV_P₃ =

	Current Price of the Stock (P₀) =

There are 3 Steps involved in it

1 Expert Approved Answer

Step: 1 Unlock blur-text-image

Question Has Been Solved by an Expert!

Get step-by-step solutions from verified subject matter experts

Step: 2 Unlock

Step: 3 Unlock