Biarritz Corp. is growing quickly. Dividends are expected to grow at a rate of 25 percent for the next three years, with the growth rate falling off to a constant 4.5 percent thereafter. If the required return is 10.5 percent and the company just paid a dividend of $2.85, what is the current share price?

Question

Colin

Business

22 May, 07:54

Biarritz Corp. is growing quickly. Dividends are expected to grow at a rate of 25 percent for the next three years, with the growth rate falling off to a constant 4.5 percent thereafter. If the required return is 10.5 percent and the company just paid a dividend of $2.85, what is the current share price?

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Answers (1)

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Nikolai Robinson · Answer 1

The current share price is $82.85

Explanation:

D1 = (2.85*1.25)

= 3.56

D2 = (3.56*1.25)

= 4.45

D3 = (4.45*1.25)

= 5.566

Value after year 3 = (D3*Growth rate) / (Required rate - Growth rate)

= (5.566*1.045) / (0.105 - 0.045)

= $96.95

current price = Future dividend and value*Present value of discounting factor

= 3.56/1.105 + 4.45/1.105^2 + 5.566/1.105^3 + $96.95/1.105^3

= $82.85

Therefore, The current share price is $82.85