Final answer:
The current stock price for Poultry Brewing Incorporated is calculated using the Dividend Discount Model, considering the initial growth rate of dividends at 18% for the first three years and a constant growth of 7% thereafter, with a required rate of return of 12%.
Step-by-step explanation:
The student's question involves calculating the current stock price for Poultry Brewing Incorporated, considering its expected dividend growth rates and the required rate of return. To determine the stock price, we'll use the Dividend Discount Model (DDM). The company recently paid a dividend of $1.24 per share, with an 18% growth expected for three years and then 7% indefinitely. As the required rate of return (rs) is 12%, we apply a two-stage DDM calculation.
Firstly, we calculate the present value of dividends for the first three years using the formula:
Dt / (1+rs)t where t is the time in years, Dt is the dividend in year t, and rs is the required rate of return. This gives us the present value of dividends expected to grow at 18%.
After the first three years, the growth rate changes to 7%, and we calculate the terminal value at the end of the third year using the Gordon Growth Model, which is D4 / (rs - g), where D4 is the dividend in year 4 and g is the constant growth rate (7%). We then discount this terminal value back to the present value.
The sum of the present values of the expected dividends and the present value of the terminal value gives us the current stock price for Poultry Brewing Incorporated.