Question

Janicex Co. is growing quickly. Dividends are expected to grow at ________ percent for the next three years,( rate is equal to 63, then 33 percent is the growth rate). The growth rate will be 8 percent in year 4 and the growth rate will fall off to a constant 6 percent thereafter. If the required return is 11 percent, and the company just paid a dividend of $1.90, what is the current share price

Answer 1

Dividend just paid D0=$1.90

For the first three years, dividends grow at 33%.

D1=D0*(1+33%)=$1.90*1.33=$2.527

D2=D1*(1+33%)=$2.527*1.33=$3.361

D3=D2*(1+33%)=$3.361*1.33=$4.47

Year4 growth rate=8% and from Year5 onwrads it grows at 6% forever.

D4=D3*(1+8%)=$4.47*1.08=$4.828

D5=D4*(1+6%)=$4.828*1.06=$5.117

Terminal value at year4=D5/(required rate of return-growth rate)=$5.117/(11%-6%)=$102.35

Value of the Share price=(D1/(1+11%))+(D2/(1+11%)^2)+(D3/(1+11%)^3)+((D4+Terminal value at year4)/(1+11%)^4)

=(2.527/1.11)+(3.361/1.11^2)+(4.470/1.11^3)+(107.173/1.11^4)

=2.28+2.73+3.27+70.60

=$78.87

Value of the Share price=$78.87