Bayou okra farms just paid a dividend of $3.95 on its stock. the growth rate in dividends is expected to be a constant 5 percent per year indefinitely. investors require a return of 14 percent for the first three years, a return of 12 percent for the next three years, and a return of 10 percent thereafter. what is the current share price?

Question

Erin

Business

8 May, 12:55

Bayou okra farms just paid a dividend of $3.95 on its stock. the growth rate in dividends is expected to be a constant 5 percent per year indefinitely. investors require a return of 14 percent for the first three years, a return of 12 percent for the next three years, and a return of 10 percent thereafter. what is the current share price?

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Alexus · Answer 1

The current Dividend (D0) = $3.95

Growth in dividend = $3.95 * (1+0.05) = $4.1475

D1 = $4.1475 / (1+0.14) = $3.64

D2 = $4.1475*1.05 / (1+0.14) ^2 = $3.64

D3 = {$3.95 * (1+0.05) ^3} / (1+0.14) ^3 = $3.35

D4 = {$3.95 * (1+0.05) ^4} / (1+0.12) ^4 = $3.09

D5 = {$3.95 * (1+0.05) ^5} / (1+0.12) ^5 = $3.05

D6 = {$3.95 * (1+0.05) ^6} / (1+0.12) ^6 = $2.86

D7 = {$3.95 * (1+0.05) ^7} = $5.56

P6 = $5.56 / (0.1 - 0.05) = $111.1609

Present value of P6 = $111.1609 / (1.1) ^6 = $62.7475

Current Price of the stock = $3.64 + $3.35 + $3.09 + $3.05 + $2.86 + $2.68 + $62.7475

Current Price of the stock = $81.42