Question

Marcel Co. is growing quickly. Dividends are expected to grow at a 21 percent rate for the next 3 years, with the growth rate falling off to a constant 4 percent thereafter.

  

Required:

If the required return is 10 percent and the company just paid a $2.80 dividend. what is the current share price? (Do not round your intermediate calculations.)

Answer 1

	Required rate=	10.00%
Year	Previous year dividend	Dividend growth rate	Dividend current year	Horizon value	Total Value	Discount factor	Discounted value
1	2.8	21.00%	3.388		3.388	1.1	3.08
2	3.388	21.00%	4.09948		4.09948	1.21	3.388
3	4.09948	21.00%	4.9603708	85.98	90.9403708	1.331	68.32485
	Long term growth rate (given)=	4.00%			Value of Stock =	Sum of discounted value =	74.79
Where
Current dividend =Previous year dividend*(1+growth rate)^corresponding year
Total value = Dividend + horizon value (only for last year)
Horizon value = Dividend Current year 3 *(1+long term growth rate)/( Required rate-long term growth rate)
Discount factor=(1+ Required rate)^corresponding period
Discounted value=total value/discount factor