Zweite Pharma is a fast-growing drug company. Management forecasts that in the next three years, the companys

Question:

Zweite Pharma is a fast-growing drug company. Management forecasts that in the next three 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. Aft er three 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 three years, and calculate their present value.

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

c. What is the current price of the stock?

Dividend
A dividend is a distribution of a portion of company’s earnings, decided and managed by the company’s board of directors, and paid to the shareholders. Dividends are given on the shares. It is a token reward paid to the shareholders for their...