Question
In: Finance
Worldwide Inc., a large conglomerate, has decided to acquire another firm. Analysts are forecasting a period...
Worldwide Inc., a large conglomerate, has decided to acquire another firm. Analysts are forecasting a period (2 years) of extraordinary growth (15 percent), followed by another 2 years of unusual growth (10 percent), and finally a normal (sustainable) growth rate of 6 percent annually. If the last dividend was D0 = $1.00 per share and the required return is 8 percent, what should the market price be today
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Expert Solution
| rate | 8.0000% | |
| Cash flows | Year | Discounted CF= cash flows/(1+rate)^year |
| - | 0 | - |
| 1.15 | 1 | 1.06 |
| 1.32 | 2 | 1.13 |
| 1.45 | 3 | 1.15 |
| 1.60 | 4 | 1.18 |
| 84.81 | 4 | 62.34 |
terminal value = 1.60*1.06/(0.08-0.06) = 84.61
market price today = 66.87
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