Question

Moody Farms just paid a dividend of $4.00 on its stock. The growth rate in dividends is expected to be a constant 6 percent per year indefinitely. Investors require a return of 15 percent for the first three years, a return of 13 percent for the next three years, and a return of 11 percent thereafter. What is the current share price?

Answer #1

P0 = [{D0 x (1 + g)} / (1 + r1)] + [{D0 x (1 + g)^{2}} /
(1 + r1)^{2}] + [{D0 x (1 + g)^{3}} / (1 +
r1)^{3}] +

[{D0 x (1 + g)^{4}} / {(1 + r1)^{3}(1 + r2)}] +
[{D0 x (1 + g)^{5}} / {(1 + r1)^{3}(1 +
r2)^{2}] +

[{D0 x (1 + g)^{6}} / {(1 + r1)^{3}(1 +
r2)^{3}] + [{D0 x (1 + g)^{7}} / {(rC - g)(1 +
r1)^{3}(1 + r2)^{3}]

= [($4 x 1.06) / 1.15] + [($4 x 1.06^{2}) /
1.15^{2}] + [($4 x 1.06^{3}) / 1.15^{3}] +
[($4 x 1.06^{4}) / (1.15^{3} x 1.13)]

+ [($4 x 1.06^{5}) / (1.15^{3} x
1.13^{2})] + [($4 x 1.06^{6}) / (1.15^{3} x
1.13^{3})] +

[($4 x 1.06^{7}) / {(0.11 - 0.06)(1.15^{3} x
1.13^{3})}]

= $3.69 + $3.40 + $3.13 + $2.94 + $2.76 + $2.59 + $54.82 = $73.31

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