Question

4b) The Rich Pharma Corporation has just invented a cheap form of energy. Investors with a 16% required rate of return expect this company to grow at an accelerated rate of 45% per year for the next 3 years and then continue at a constant growth rate of 15% per year. What would investors be willing to pay for the common stock if the most recent annual dividend was $4.00 per share?

Answer 1

Maximum price of stock = $917.50
Statemnet showing Current Price
Particulars	Time	PVf 16%	Amount	PV
Cash inflows (Dividend)	1.00	0.8621	5.8000	5.00
Cash inflows (Dividend)	2.00	0.7432	8.4100	6.25
Cash inflows (Dividend)	3.00	0.6407	12.1945	7.81
Cash inflows (Price)	3.00	0.6407	1,402.3675	898.44
Current Price of Stock				917.50
P3 = D4/ke-g
P3= 12.1945*1.15/(16%-15%)
P3= 14.0237/(1%)
P3= $1,402.37