Biogenetics Inc plans to retain and reinvest all of their earnings for the next 30 years

Economics Sep 16, 2020

Biogenetics Inc plans to retain and reinvest all of their earnings for the next 30 years. Investors believe that at the end of year 31 the firm will pay a dividend of $12 per share. The dividend will increase at a 6% rate annually thereafter. Given a return of 15%, what is the selling price of the stock?

Expert Solution

Value of stock at the end of 30 years = $12/(15%-6%)=133.33
Current value of stock = $133.33/(1+15%)^30=2.01
So the selling price of the stock is $2.01

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