Question

Fuji Co. is growing quickly. Dividends are expected to grow at a rate of 20 percent for the next three years, with the growth rate falling off to a constant 5 percent thereafter. If the required return is 11 percent and the company just paid a dividend of $3.10, what is the current share price? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) 

Current share price = _______ 

Answer 1

D1=(3.1*1.2)=3.72

D2=(3.72*1.2)=4.464

D3=(4.464*1.2)=5.3568

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

=(5.3568*1.05)/(0.11-0.05)

=93.744

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

=3.72/1.11+4.464/1.11^2+5.3568/1.11^3+93.744/1.11^3

=$79.44(Approx).