Question

Sea Side, Inc., just paid a dividend of $2.32 per share on its stock. The growth rate in dividends is expected to be a constant 5.9 percent per year indefinitely. Investors require a return of 22 percent on the stock for the first three years, then a return of 17 percent for the next three years, and then a return of 15 percent thereafter. What is the current share price? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Answer 1

Last Dividend, D0 = $2.32

Constant growth rate, g = 5.9%

D1 = $2.3200 * 1.059 = $2.4569
D2 = $2.4569 * 1.059 = $2.6019
D3 = $2.6019 * 1.059 = $2.7554
D4 = $2.7554 * 1.059 = $2.9180
D5 = $2.9180 * 1.059 = $3.0902
D6 = $3.0902 * 1.059 = $3.2725
D7 = $3.2725 * 1.059 = $3.4656

Required return for first 3 years is 22%, for next 3 years is 17%, and required return (r) of 15% thereafter.

P6 = D7 / (r - g)
P6 = $3.4656 / (0.15 - 0.059)
P6 = $38.0835

P0 = $2.4569/1.22 + $2.6019/1.22^2 + $2.7554/1.22^3 + $2.9180/1.17^4 + $3.0902/1.17^5 + $.2725/1.17^6 + $38.0835/1.17^6
P0 = $23.20

So, current share price is $23.20