Question

Marcel Co. is growing quickly. Dividends are expected to grow at a 20 percent rate for the next 3 years, with the growth rate falling off to a constant 7 percent thereafter. Required: If the required return is 11 percent and the company just paid a $3.00 dividend. What is the current share price?

Answer 1

$111.94

Step-by-step explanation:

Find dividend per year;

D1 = 3*(1.20) = 3.60

D2 = 3.60*(1.20) = 4.32

D3 = 4.32*(1.20) = 5.184

D4 = 5.184* (1.07) = 5.5469

Next, find PV of dividends at 11% required return;

PV(of D1) = 3.60/ 1.11 = 3.2432

PV(of D2) = 4.32/ 1.11² = 3.5062

PV(of D3) = 5.184/ 1.11³ = 3.7905

Next, find PV of terminal cashflow;

PV (of D4 onwards) =
`((5.5469)/(0.11-0.07) )/((1.11)^(3) )`

PV (of D4 onwards) =
`(138.6725)/(1.3676)`

= 101.3984

Next, sum up the PVs to get the price of the stock;

= 3.2432 + 3.5062 + 3.7905 + 101.3984

Price = $111.94