Question

Hughes Co. is growing quickly. Dividends are expected to grow at a 28 percent rate for the next three years, with the growth rate falling off to a constant 7 percent thereafter. If the required return is 12 percent and the company just paid a $2.65 dividend, what is the current share price?

Answer 1

D0		2.65
D1	2.65+28%	3.39
D2	3.39+28%	4.34
D3	4.34+28%	5.56
D4	5.56+7%	5.95
Horizon value at Year-3 = D4 / (Require rate - Growth rate)
		5.95 /(12-7)% = 119
Price
Year	Cashflows	PVF at 12%	Present value
1	3.39	0.892857	3.026786
2	4.34	0.797194	3.459821
3	5.56	0.71178	3.957498
3	119	0.71178	84.70185
Stock price			95.15
Answer is $ 95.15