Question

I am a little confused on how to start this problem:

"BlueCorp. is growing quickly. Dividends are expected to grow at a rate of 19 percent for the next three years, with the growth rate falling off to a constant 4.7 percent thereafter. If the required return is 10.53 percent and the company just paid a $3.88 dividend, what is the current share price?"

I believe we use the P=D(1+g)/(R-g)

so we set up the first 3 years as:

3.88/(10.53-.19)+3.88(1.19)/(10.53-.19)^2+3.88(1.19)/(10.53-.19)^3=0.42260

after this I am not sure what to do or I am even on the right track...

Answer 1

Year 1 dividend = 3.88 * 1.19 = 4.6172

Year 2 dividend = 4.6172 * 1.19 = 5.49447

Year 3 dividend = 5.49447 * 1.19 = 6.53842

Year 4 dividend = 6.53842 * 1.047 = 6.84572

Value at year 3 = D4 / required rate - growth rate

Value at year 3 = 6.84572 / 0.1053 - 0.047

Value at year 3 = 6.84572 / 0.0583

Value at year 3 = 117.4223

Current price = 4.6172 / (1 + 0.1053)¹ + 5.49447 / (1 + 0.1053)² + 6.53842 / (1 + 0.1053)³ + 117.4223 / (1 + 0.1053)³

Current price = $100.47