Question

2) (35%) EFG Company is experiencing a rapid growth at the moment. It is estimated that the company will grow at a 30% (gi) for the next three years and the growth rate (gı) will be 20% from year 3 to year 4, and will remain at a growth rate of 6% (93) thereafter (from year 4 to year 5 and onward). If the required rate of the stock is 12%, and the current stock price is $70, calculate the followings. (a) Calculate the dividends ofi) years 3, ii) year 4 and iii) year 5 (express all in terms of current dividend, Do). (b) Calculate the stock price in year 4 (P4) (express all in terms of current dividend, D.). (c) Calculate the current dividend (Do) using information in (a) and (b) above. (d) Calculate the year 1 dividend (Di). (e) Recalculate the stock price in $ for (i) year 4 (P4) and (ii) year 0 (Po).

Answer 1

Growth in Last Year=35%.Let Previous Year’s Market Price be x.

70=x+0.35x

70=1.35x

52=x

.Current Dividend =70-52=$18.

Market Price of Share after 3 yrs=70+(70*30*3/100)=70+63=$133.

a.)i)Dividend For Three Years=133-70=$63.

Dividend For 1 year=63/3=$21

Dividend for three Years in terms of Current Dividend=63/18=4.5 times or 450%.

Dividend For the 4th Year=(133*20/100)=$26.4=1.47=147%.

Dividend For 4th Year in terms of Current Dividend=26.4/18=1.47 or 147.5%.

Dividend For The 5th Year=133+26.4=(159.4*6)/100=$9.56.

Dividend For the 5th Year in terms of Current Dividend=9.56/18=0.5311=53.11%.

b.)Stock Price for 4th Year(P4)=133+26.4=$159.4.

P4 in terms of Current Dividend=159.4/18=8.55.

c.)Current Dividend=21/1.3=S16.15.

d.)Dividend For 1 year=63/3=$21.

e.)i)Stock Price of 4th Year=133+(0.2*133)=$159.4.

ii)Growth in Last Year=35%.Let Previous Year’s Market Price be x.

70=x+0.35x

70=1.35x

$52=x.

.