Question

Management of Blossom, 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 $1.65 last week. If the required rate of return is 15 percent, what is the value of this stock?

Value of Stock $______

Answer 1

	Required rate=	15.00%
Year	Previous year dividend	Dividend growth rate	Dividend current year	Horizon value	Total Value	Discount factor	Discounted value
1	1.65	35.00%	2.2275		2.2275	1.15	1.937
2	2.2275	28.00%	2.8512		2.8512	1.3225	2.15592
3	2.8512	22.00%	3.478464	63.192	66.670464	1.520875	43.83691
	Long term growth rate (given)=	9.00%			Value of Stock =	Sum of discounted value =	47.93
Where
Current dividend =Previous year dividend*(1+growth rate)^corresponding year
Total value = Dividend + horizon value (only for last year)
Horizon value = Dividend Current year 3 *(1+long term growth rate)/( Required rate-long term growth rate)
Discount factor=(1+ Required rate)^corresponding period
Discounted value=total value/discount factor