Question

Marcel Co. is growing quickly. Dividends are expected to grow at a rate of 0.09 for...

Marcel Co. is growing quickly. Dividends are expected to grow at a rate of 0.09 for the next 4 years, with the growth rate falling off to a constant 0.03 thereafter. If the required return is 0.07 and the company just paid a $1.07 dividend, what is the current share price?

Homework Answers

Answer #1

The current value of the stock 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) ]

= ($ 1.07 x 1.09) / 1.071 + ($ 1.07 x 1.092) / 1.072 + ($ 1.07 x 1.093) / 1.073 + ($ 1.07 x 1.094) / 1.074 + 1 / 1.074 x [ ($ 1.07 x 1.094 x 1.03) / (0.07 - 0.03)

= $ 1.1663 / 1.07 + $ 1.271267 / 1.072 + $ 1.38568103 / 1.073 + $ 1.510392323 / 1.074 + $ 38.89260231 / 1.074

= $ 1.1663 / 1.07 + $ 1.271267 / 1.072 + $ 1.38568103 / 1.073 + $ 40.40299463 / 1.074  

= $ 34.15

Do ask in case of any doubts.

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