Question

Apocalyptica Corporation is expected to pay the following dividends over the next four years: $5.80, $17.80, $20.80, and $4.60. Afterward, the company pledges to maintain a constant 4.75 percent growth rate in dividends, forever. What is the current share price, given a required return of 10%?

Answer 1

The current share price is computed as shown below:

= Dividend in year 1 / (1 + required rate of return)¹ + Dividend in year 2 / (1 + required rate of return)² + Dividend in year 3 / (1 + required rate of return)³ + Dividend in year 4 / (1 + required rate of return)⁴ + 1 / (1 + required rate of return)⁴ [ ( Dividend in year 4 (1 + growth rate) / ( required rate of return - growth rate ) ]

= $ 5.80 / 1.10¹ + $ 17.80 / 1.10² + $ 20.80 / 1.10³ + $ 4.60 / 1.10⁴ + 1 / 1.10⁴ [ ( $ 4.60 x 1.0475 ) / ( 0.10 - 0.0475 ) ]

= $ 5.80 / 1.10¹ + $ 17.80 / 1.10² + $ 20.80 / 1.10³ + $ 4.60 / 1.10⁴ + $ 91.78095238 / 1.10⁴

= $ 101.44 Approximately

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