Question

Biarritz Corp. is growing quickly. Dividends are expected to grow at a rate of 30 percent...

Biarritz Corp. is growing quickly. Dividends are expected to grow at a rate of 30 percent for the next three years, with the growth rate falling off to a constant 7 percent thereafter. The required return is 13 percent and the company just paid a dividend of $2.60.

What are the dividends each year for the next four years? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)

What is the share price in three years? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

What is the current share price? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Homework Answers

Answer #1

1)

Year 1 dividend = 2.6 (1 + 0.3) = 3.38

Year 2 dividend = 3.38 (1 + 0.3) = 4.39

Year 3 dividend = 4.39 (1 + 0.3) = 5.71

Year 4 dividend = 5.71 (1 + 0.07) = 6.11

2)

Share price = Year 4 dividend / required rate - growth rate

Share price = 6.11 / 0.13 - 0.07

Share price = 6.11 / 0.06

Share price = $101.83

3)

Presnet value = Future value / (1 + rate)^time

Current share price = Present value of future dividends

Current share price = 3.38 / (1 + 0.13)^1 + 4.39 / (1 + 0.13)^2 + 5.71 / (1 + 0.13)^3 + 101.83 / (1 + 0.13)^3

Current share price = $80.96

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