Question

Chain Reaction SA, has been growing at a phenomenal rate of 30% per year because of...

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?

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Answer #1
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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