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Dialysis is a biotech company that is expected to experience short-term supernormal dividend growth rates of 50% in year 1, 40% in year 2 and 25% in year 3. After 3 years of supernormal growth, this company dividend is expected to grow at a constant rate of 5%. However, in most recent month, analysts have made downward projection on its short-term growth rates to 35% in year 1, 26% in year 2 and 15% in year 3 and long-term constant growth rate of 5% due to uncertainty of the world economy. If the most recent dividend paid is $2 per share and its required return remains at 15%, approximately how much do you expect the reduction in Dialysis stock price per share today? Please Show Work A) $20.91 B) $17.93 C) $15.34 D) $10.98 E) $4.22

Dialysis is a biotech company that is expected to experience short-term supernormal dividend growth rates of 50% in year 1, 40% in year 2 and 25% in year 3. After 3 years of supernormal growth, this company dividend is expected to grow at a constant rate of 5%. However, in most recent month, analysts have made downward projection on its short-term growth rates to 35% in year 1, 26% in year 2 and 15% in year 3 and long-term constant growth rate of 5% due to uncertainty of the world economy. If the most recent dividend paid is $2 per share and its required return remains at 15%, approximately how much do you expect the reduction in Dialysis stock price per share today? Please Show Work A) $20.91 B) $17.93 C) $15.34 D) $10.98 E) $4.22

Essentials Of Investments
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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  1. Dialysis is a biotech company that is expected to experience short-term supernormal dividend growth rates of 50% in year 1, 40% in year 2 and 25% in year 3. After 3 years of supernormal growth, this company dividend is expected to grow at a constant rate of 5%. However, in most recent month, analysts have made downward projection on its short-term growth rates to 35% in year 1, 26% in year 2 and 15% in year 3 and long-term constant growth rate of 5% due to uncertainty of the world economy. If the most recent dividend paid is $2 per share and its required return remains at 15%, approximately how much do you expect the reduction in Dialysis stock price per share today? Please Show Work
  2. A) $20.91
  3. B) $17.93
  4. C) $15.34
  5. D) $10.98
  6. E) $4.22
Expert Solution
Step 1: Formula.

Terminal value is calculated as follows:-

Terminal value = fraction numerator D asterisk times left parenthesis 1 plus g right parenthesis over denominator r minus g end fraction

where

D= dividend paid

g = growth rate

r = required return

steps

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