Question

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?

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

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