Question

Current Attempt in Progress Management of Wildhorse, 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 $1.30 last week. If the required rate of return is 18 percent, what is the value of this stock? (Round intermediate calculations and final answer to 2 decimal places, eg. 15.20.) Value of stock $

Answer 1

To calculate the value of a stock, we can use the Gordon Growth Model. The formula for the value of a stock is: Value = D1 / (r - g). Using this formula and the given information, we can calculate the value of the stock.

Step-by-step explanation:

To calculate the value of a stock, we can use the Gordon Growth Model. The formula for the value of a stock is:

Value = D1 / (r - g)

Where D1 is the dividend expected to be received one year from now, r is the required rate of return, and g is the expected constant growth rate. In this case, the dividends for the next three years are: $1.30, $1.30 * 1.35, and $1.30 * 1.35 * 1.28. To calculate the value of the stock, we need to find the present value of these future dividends.

Using the formula above, we can calculate the present value of the future dividends:

Value = $1.30 / (0.18 - 0.09) + ($1.30 * 1.35) / (0.18 - 0.09)^2 + ($1.30 * 1.35 * 1.28) / (0.18 - 0.09)^3

Calculating this expression will give us the value of the stock.