Question

Nonconstant growth: Tre-Bien, Inc., is a fast-growing technology company. Management projects rapid growth of 30 percent for the next two years, then a growth rate of 17 percent for the following two years. After that, a constant-growth rate of 8 percent is expected. The firm expects to pay its first dividend of $2.45 a year from now. If dividends will grow at the same rate as the firm and the required rate of return on stocks with similar risk is 22 percent, what is the current value of the stock?

Nonconstant growth: 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?

NO EXCEL PLEASE. If you do use it please explain how getting each answer. Thank you so much

Answer 1

1). Value of Stock = [D1 / (1 + r)] + [{D1 * (1 + g1)} / (1 + r)²] + [{D1 * (1 + g1) * (1 + g2)} / (1 + r)³] + [{D1 * (1 + g1) * (1 + g2)²} / (1 + r)⁴] + [{D1 * (1 + g1) * (1 + g2)² * (1 + gC)} / {(r - gC) * (1 + r)⁴}]

= [$2.45 / (1 + 0.22)] + [{$2.45 * (1 + 0.30)} / (1 + 0.22)²] + [{$2.45 * (1 + 0.30) * (1 + 0.17)} / (1 + 0.22)³] + [{$2.45 * (1 + 0.30) * (1 + 0.17)²} / (1 + 0.22)⁴] + [{$2.45 * (1 + 0.30) * (1 + 0.17)² * (1 + 0.08)} / {(0.22 - 0.08) * (1 + 0.22)⁴}]

= $2.01 + $2.14 + $2.05 + $1.97 + $15.18 = $23.35

2). Value of Stock = [{D0 * (1 + g1)} / (1 + r)] + [{D0 * (1 + g1) * (1 + g2)} / (1 + r)²] + [{D0 * (1 + g1) * (1 + g2) * (1 + g3)} / (1 + r)³] + [{D0 * (1 + g1) * (1 + g2) * (1 + g3) * (1 + gC)} / {(r - gC) * (1 + r)³}]

= [{$1.75 * (1 + 0.35)} / (1 + 0.20)] + [{$1.75 * (1 + 0.35) * (1 + 0.28)} / (1 + 0.20)²] + [{$1.75 * (1 + 0.35) * (1 + 0.28) * (1 + 0.22)} / (1 + 0.20)³] + [{$1.75 * (1 + 0.35) * (1 + 0.28) * (1 + 0.22) * (1 + 0.09)} / {(0.20 - 0.09) * (1 + 0.20)³}]

= $1.97 + $2.10 + $2.14 + $21.16 = $27.36