Question

Hungry Hippos Corp is a fast-growth company. Dividends are expected to grow at a rate of 30 percent for the next three years, with the growth rate falling off to a constant 5 percent thereafter. If the required return is 11 percent, and the company just paid a dividend of $2.80, what is the current share price? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Answer 1

$86.22

Step-by-step explanation:

P3 = D3 * (1+g) / (R - g)

P3 = D0*(1+g)^3*(1+g) / (R - g)

P3 = $2.80*(1+0.30)^3*(1+0.05) / (0.11-0.05)

P3 = $6.45918 / 0.06

P3 = $107.653

P0 = $2.80(1.3)/(1.11) + $2.80(1.3)^2/(1.11)^2 + $2.80(1.3)^3/(1.11)^3 + $107.65/(1.13)^3

P0 = $3.2792 + $3.8406 + $4.4980 + $74.6068

P0 = $86.2246

P0 = $86.22

Thus, the price of the stock today is $86.22.