Question 1: Worldwide Inc., a large conglomerate, has decided to acquire another firm by purchasing the firm's outstanding stock from the stockholders. Analysts of the firm to be purchased are forecasting 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 percent. What is D4 (i.e., the dividend expected at end of period 4)?
a. 1.0000
b. 1.286
c. 1.584
d. 1.687
e. 1.440
Question 2: Assuming D4 ( I.e., the dividend at end of period 4) is expected to be $2.00 (regardless of your answer above), what is P3 (i.e., expected price at the end of period 3)?
a. 0.95
b. 2.00
c. 23.26
d. 30.77
e. 95.24
f. Insufficient information to compute