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home / study / business / finance / finance questions and answers / farmer’s market inc. just paid an annual dividend of $5 on its stock. the growth rate in ... Your question has been answered Let us know if you got a helpful answer. Rate this answer Question: Farmer’s Market Inc. just paid an annual dividend of $5 on its stock. The growth rate in divide... Farmer’s Market Inc. just paid an annual dividend of $5 on its stock. The growth rate in dividends is expected to be a constant 5% per year indefinitely. Investors require a 10% return on the stock for the first 3 years, a 7% return for the next 5 years, and a 8% return thereafter. What is the current price per share?

Answer 1

Year	Dividend	PV
1	5.25	4.77
2	5.51	4.56
3	5.79	4.35
4	6.08	4.27
5	6.38	4.19
6	6.70	4.11
7	7.04	4.03
8	7.39	3.96
9	7.76	138.50
	Price	172.73

Forecast the dividends for the next 9 years given the growth rates.

D1 = D0 x (1 + g) = 5 x (1 + 5%) = 5.25, D2 = 5 x 1.05^2 = 5.51 and so on... D9 = 5 x 1.05^9 = 7.76

Terminal Stock Price in year 9, P9 = D9 x (1 + g) / (r - g) = 7.76 x (1 + 5%) / (8% - 5%) = $271.48

Current Price per share is equal to the present value of each dividend and the terminal stock price.

PV of D1 = D1 / (1 + r1)^1 = 5.25 / 1.10 = 4.77, PV of D2 = 5.51 / 1.1^2 = 4.56

PV of D4 = 6.08 / (1.1^3 x 1.07^1) = 4.27, PV of D5 = 6.38 / (1.1^3 x 1.07^2) = 4.19 and so on...

PV of D9 + P9 = (7.76 + 271.48) / (1.1^3 x 1.07^5 x 1.08^1) = $138.50

Current Stock Price = Sum of all PV = $172.73