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6 November, 23:40

Burton Corp. is growing quickly. Dividends are expected to grow at a rate of 29 percent for the next three years, with the growth rate falling off to a constant 7.3 percent thereafter. If the required return is 15 percent and the company just paid a dividend of $3.40, what is the current share price?

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  1. 6 November, 23:48
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    The Current share price is $94.79

    Explanation:

    Dividend Growth Model determines the share price of a company which offers perpetual dividend with stable growth. It is the expected dividend of a share divided by the net return rate of growth rate.

    According to given data

    Last dividend = D0 = $3.40

    Rate of return = 15%

    Growth rates:

    For 3 years = 29% per year

    After 3 years = 7.3% in perpetuity

    Dividend after 3 years = D3 = 3.40 x (1 + 0.29) ^3 = $7.30

    We can calculate the price of share using following formula:

    Price of share = D3 / Rate of return - Growth rate

    Price of share = $7.30 / 15% - 7.3% = $7.30 / 7.70% = $94.79
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