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Homework answers / question archive / Worldwide Inc
Worldwide Inc. has decided to acquire another firm by purchasing the firm's outstanding stock. Analysts forecast a period of 2 years of extraordinary growth (20 percent), followed by 1 year of unusual growth (10 percent), and finally a normal (sustainable) growth rate of 6.5 percent annually indefinitely. The last dividend was D0= $1.00 per share and the required return is 8.6%. What is D4 (i.e., the dividend expected at end of period 4)?
Computation of year 4 dividend;
Year 1 dividend = $1 * (1+ 20%)
= $1.2
Year 2 dividend = $1.2 * (1+ 20%)
= $1.44
Year 3 dividend = $1.44 * (1+ 10%)
= $1.584
Year 4 dividend = $1.584 * (1+ 6.5%)
= $1.687
