Question

Marcel Co. is growing quickly. Dividends are expected to grow at a rate of 0.1 for the next 4 years, with the growth rate falling off to a constant 0.05 thereafter. If the required return is 0.08 and the company just paid a $0.81 dividend, what is the current share price? Answer with 2 decimals (e.g. 45.45).

Answer 1

Solution:

Current share price is the present value of the expected dividend and the terminal value at the end of year 4.

Expected dividend on stock:

Year 1dividend(D1)=0.81*1.1=$0.891

Year 2 dividend(D2)=$0.891*1.1=$0.9801

D3=$0.9801*1.10=$1.07811

D4=$1.07811*1.10=$1.185921

D5=$1.185921*1.05=$1.24521705

Terminal Value=D5/required return-Growth rate

=$1.24521705/0.08-0.05

=$41.507235

Current share Price

=$0.891/(1.08)^1+$0.9801/(1.08)^2+$1.07811/(1.08)^3+$1.185921/(1.08)^4+$41.507235/(1.08)^4

=$33.90