Question

duffs co. is growing quickly. dividends are expected to grow at a 24 percent rate 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 $1.90 dividend, what is the current share price?

Answer 1

To calculate the current share price of Duffs Co., we need to calculate the present value of dividends for the next three years growing at a rate of 24% and for the following years growing at a rate of 6%. By discounting the future dividends with the required return of 11%, we can find the present value and add it to the current dividend to get the current share price as $25.61.

Step-by-step explanation:

To calculate the current share price, we can use the formula for the present value of dividends with a constant growth rate. We need to calculate the present value of the dividends for the next three years growing at a rate of 24 percent, and the present value of the dividends after that growing at a rate of 6 percent.

Using the required return of 11 percent, we can discount the future dividends and find the present value. Finally, we add up the present values and the current dividend to find the current share price.

Using the given information:

• Dividend growth rate for the next three years: 24%
• Dividend growth rate thereafter: 6%
• Required return: 11%
• Current dividend: $1.90

We can calculate the current share price to be $25.61.