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 6 percent thereafter. If the required return is 11 percent and the company just paid a dividend of $1.15, what is the current share price?

Question

Joslyn

Business

5 August, 06:21

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 6 percent thereafter. If the required return is 11 percent and the company just paid a dividend of $1.15, what is the current share price?

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Answers (1)

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Felipe Koch · Answer 1

The current price per share is $39.21

Explanation:

The two stage dividend growth model will be used to calculate the price of the share today. The first three years dividends will be calculated and discounted back and when dividend growth becomes constant, the terminal value will be calculated and discounted back to today's price.

The price per share = D1 / 1+r + ... + D3 / (1+r) ³ + [ (D4 / r - g) / (1+r) ³]

The current price per share is,

P = 1.15 * (1+0.25) / (1+0.11) + 1.15 * (1+0.25) ² / (1+0.11) ² + 1.15 * (1+0.25) ³ / (1+0.11) ³ + [ (1.15 * (1+0.25) ³ * (1+0.06) / 0.11 - 0.06) / (1+0.11) ³]

Price per share today = $39.21