Question

Marcel Co. is growing quickly. Dividends are expected to grow at a 19 percent rate for the next 3 years, with the growth rate falling off to a constant 5 percent thereafter.

Required: If the required return is 9 percent and the company just paid a $2.40 dividend. what is the current share price?

Answer 1

D1=(2.4*1.19)=2.856

D2=(2.856*1.19)=3.39864

D3=(3.39864*1.19)=4.0443816

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

=(4.0443816*1.05)/(0.09-0.05)

=$106.165017

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

=2.856/1.09+3.39864/1.09^2+4.0443816/1.09^3+106.165017/1.09^3

=$90.58(Approx).