Supernormal Growth Problem 9.35 W N 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. Do = 10 g1 = 11 g2 12 Required Rate of Return (R) = D1 = PV_D1 = D, = PV_D, = D3 = PV_D3 = PV of Dividends (years 1-3): 20 b. Calculate the price of the stock at the end of year 3, when the firm settles to a constant growth rate. 23 Hint: Calculate D4 (expected dividend in year 4) and use the constant growth dividend model to estimate P3. 24 25 Constant Growth Rate (g) = 26 DA= 27 P3 = 29 30 c. What is the current price of the stock? 31 32 Hint: Find the present value of P3 and add this amount to the present value of the first three years of dividends. 33 34 PV_P3 = 35 36 Current Price of the Stock (Po) = 37