Question

Genestek Inc. just paid a $5.00 dividend. Due to a new product about to be released, analysts expect the company to grow at a supernormal rate of 15% for three years. After that it is expected to grow at a normal rate of 4% indefinitely. Stocks similar to Genestek are currently earning shareholders a return of 12%. The estimated selling price of the stock is:

Answer 1

To determine the price an investor will pay for a share of stock in Genestek Inc., we can use the discounted cash flow (DCF) valuation method. The investor will need to pay approximately $136.23 for a share of stock in Genestek Inc.

Step-by-step explanation:

To determine the price an investor will pay for a share of stock in Genestek Inc., we can use the discounted cash flow (DCF) valuation method. First, we need to calculate the present value of the expected future dividends. Assuming a required rate of return of 12%, we can calculate the present value of the dividends using the formula:

Present Value = Dividend / (1 + r) + Dividend / (1 + r)^2 + ... + Dividend / (1 + r)^n

where Dividend is the expected dividend for each year and r is the required rate of return. In this case, the expected dividend for the first three years is $5 and for the indefinite period is $5 * (1 + 4%) / (12% - 4%) = $85.

Using the formula with the given values, we get:

Present Value = $5 / (1 + 12%) + $5 / (1 + 12%)^2 + $5 / (1 + 12%)^3 + $85 / (1 + 12%)^3

Simplifying the equation, we find that the investor will need to pay approximately $136.23 for a share of stock in Genestek Inc.