Biarritz Corp. is growing quickly. Dividends are expected to grow at a rate of 31 percent for the next three years, with the growth rate falling off to a constant 76 percent thereafter.

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Biarritz Corp. is growing quickly. Dividends are expected to grow at a rate of 31 percent for the next three years, with the growth rate falling off to a constant 76 percent thereafter.

If the required return is 12 percent and the company just paid a dividend of $1.75, what is the current share price? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Share price = _______

business accounting

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Answer 1

Answer #1

Answer:

D1=(1.75*1.31)=2.2925

D2=(2.2925*1.31)=3.003175

D3=(3.003175*1.31)=3.93415925

Value after year 3=(D3*Growth rate)/(Required rate-Growth rate)

=(3.93425925*1.076)/(0.12-0.076)

=96.2081

Hence current price=Future dividend and value*Present value of discounting factor(rate%,time period)

=2.2925/1.12+3.003175/1.12^2+3.93415925/1.12^3+96.2081/1.12^3

=$75.72027(Approx).

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Answer 2

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Biarritz Corp. is growing quickly. Dividends are expected to grow at a rate of 30 percent for the next three years, with the growth rate falling off to a constant 6 percent thereafter.