Question

ThisIsNotHappening has no competition in business and is growing quickly. This company's annual dividends are expected to grow at 20 percent per year for the next 3 years. The growth rate in dividends will then drop to a constant 5 percent per year, in perpetuity, due to competitors joining the market and lowering ThisIsNotHappening company's market share. The required return is 12 percent. You also know that the company just paid a $2.60 dividend on each of its shares. Calculate the current share price.

Answer 1

current price = 56.94.

year	cash flow	present value factor	present value factor * dividend
1	2.60*1.20=>3.12	1/(1.12)^1=>0.89285714	3.12*0.89285714=>2.78571428
2	3.12*1.20=>3.744	1/(1.12)^2=>0.79719388	3.744*0.79719388=>2.98469389
3	3.744*1.20=>4.4928	1/(1.12)^3=>0.71178025	4.4928*0.71178025=>3.19788631
3	(see note)67.392	1/(1.12)^3=>0.71178025	67.392*0.71178025=>47.9682946
		current share price	56.94

note:

value of share by the end of year 3 = d*(1+g)/ (ke -g)

4.4928*(1.05)/(0.12-0.05)

=>67.392.