Question

Marcel Co. is growing quickly. Dividends are expected to grow at a rate of 0.15 for the next 4 years, with the growth rate falling off to a constant 0.05 thereafter. If the required return is 0.12 and the company just paid a $0.83 dividend, what is the current share price? Answer with 2 decimals (e.g. 45.45).

Answer 1

$14.94

Step-by-step explanation:

Calculation to determine the current share price

D1=(0.83*1.12)=0.9296

D2=(0.9296*1.12)= 1.041152

D3=(1.041152*1.12)= 1.16609024

Value after year 3=(D3*Growth rate)/(Required rate-Growth rate)

=(1.16609024 *1.05)/(0.12-0.05)

=1.224394752/0.07

=$17.4913536

Hence current price=Future dividend and value*Present value of discounting factor(rate%,time period)

=(0.9296/1.12)+ (1.041152 /1.12^2)+( 1.16609024/1.12^3)+ ($17.4913536/1.12^3)

=0.83+0.83+0.83+$12.45

=$14.94