Question

Marcel Co. is growing quickly. Dividends are expected to grow at a 17 percent rate for the next 3 years, with the growth rate reducing to only a constant 4 percent thereafter. Required: If the required return is 9 percent and the company just paid a $3.00 dividend, what is the current share price? Note: since the dividend at time 0 of $3.00 has just been paid, do not include it in the price at time 0. (Do not round your intermediate calculations.)

• $87.56

• $83.85

• $85.81

• $81.19

• $89.31

Answer 1

Answer-

Dividend

D0 = $ 3.00
D1 = $ 3.00 x 1.17 = $ 3.51
D2 = $ 3.51 x 1.17 = $ 4,107
D3 = $ 4.12 x 1.17 = $ 4.80

Price at year 3, P3 = D4 / (r - g)

r = required return = 9 % = 0.09
g = constant growth = 4 % = 0.04

P3 = D3 x ( 1+ g) / ( r -g )

P3 = $ 4.80 x ( 1 +0.04) / ( 0.09 - 0.04)

P3 = $ 4.80 x 1.04 / 0.05

P3 = $ 4.992 / 0.05

P3 = $ 99.84

The currect value of share price is calculated by

CF0 = $ 0 , CF1 = $ 3.51, CF2 = $ 4.107, CF3 = $ 4.8 + $ 99.84 = $ 104.64 [ CF = cash flow , CF3 = D3 + P3 ]

r = 9 %

NPV or current value of share = $ 3.51 / 1.09 + $ 4.107 / 1.09² + $ 104.64 / 1.09³

= $ 3.51 / 1.09 + $ 4.107 / 1.881 + $ 104.64 / 1.295

= $ 3.22 + $ 2.18 + $ 80.49

= $ 85.89

Therefore the current stock price = $ 85.89 ~ $ 85.81 which is the third option

[ Difference in value due to rounding off decimals ]