Question

Biogenetics, Inc. plans to retain and reinvest all of their earnings for the next 30 years. Beginning in year 31, the firm will begin to pay a $12.00 per share dividend. The dividend will increase at a 6% rate annually thereafter. Given a required return of 15%, what should the stock should sell for today

Answer 1

The stock should sell for $2.01 today

Step-by-step explanation:

Using the dividend valuation model the value of a share is the present value of the expected future cash flow discounted at the required rate of return.

Step 1

Calculate the PV (in year 30) of the future dividend

P = 12/(015-0.06)

PV (in year 30) = $133.33

Step 2

Re-discount to determine the present value in year 0

PV( in year 0) = 133.33 × (1.15)^(-30)

= $2.01

The stock should sell for $2.01 today