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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

jeff jeffy answered 2 years ago
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