Chain Reaction SA, has been growing at a phenomenal rate of 30%
per year because of its rapid
expansion and explosive sales. You believe that this growth rate
will last for three more years and
that the rate will than drop to 10% per year. Total dividends just
paid were 5 million euros, and
the required return is 20%. If the growth rate than remains at 10%
indefinitely, what is the current
share price?
Dividend Just paid = 5 Million Euros | ||||||
Million Euros | ||||||
Year | Growth Rate | Dividends | ||||
1 | 30.00% | 6.5000 | ||||
2 | 30.00% | 8.4500 | ||||
3 | 30.00% | 10.9850 | ||||
4 | 10.00% | 12.0835 | ||||
Year | Cash Flows | Discount Factor @20% | Discounted Values | |||
1 | 6.500 | 0.833 | 5.417 | |||
2 | 8.450 | 0.694 | 5.868 | Terminal Value (P3) = D4/ Ke -growth Rate | ||
3 | 10.985 | 0.579 | 6.357 | P3 = 12.0835/20% - 10% | ||
3 | 120.835 | 0.579 | 69.928 | P3 =120.835 | ||
Value of Stock | 87.569 Euros | |||||
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