Question

Biarritz Corp. is growing quickly. Dividends are expected to grow at a rate of 25 percent for the next three years, with the growth rate falling off to a constant 4.5 percent thereafter. If the required return is 10.5 percent and the company just paid a dividend of $2.58, what is the current share price? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Answer 1

Current share price = present value of next 3 years dividend + present value of terminal value at end of 3 years

Terminal value at end of 3 years = Year 3 dividend * (1 + growth rate after 3 years) / (required return - growth rate after 3 years)

Present value = future value / (1 + required return)number of years

Current share price = $75.00

Current share price = $75.00