Question

Primanti Brothers’ last dividend was $2.00. The dividend growth rate is expected to be constant at 10% for 3 years, after which dividends are expected to grow at a rate of 3% forever. If the firm's required return (rs) is 5%, what is its current (expected) stock price?

Answer 1

Answer Current Market price of share = $ 125.02

Initial Growth Rate = 10%, Normal Growth Rate = 3% and cost of equity = 5% Do = $2

Current Market Price can be find out using the following formual

D1 = Do(1+g) = 2*(1+0.10) = $2.20

D2 = D1(1+g) = 2.2*(1+0.10) = 2.42

D3 = D2*(1+g) = 2.42*(1+0.10) = 2.662

Now g = 3% forebver, so D4 = D3(1+g) = 2.662 *(1+0.03) = 2.742

P3 = D4/(Ke-g) = 2.742 / (0.05 - 0.03) = 137.09

Current Market Price = D1/(1+ke) + D2/(1+ke)^2 + (D3+P3) / (1+ke)^3

= 2.2/(1+0.05) + 2.42/(1+0.05)^2 + (2.662+137.09) / (1+0.05)^3

=2.09 + 2.19 + 120.73 = $125.02