Question

Phillips 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 14 percent and the company just paid a dividend of $2.50, 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=(2.5*1.2)=3

D2=(3*1.2)=3.6

D3=(3.6*1.2)=4.32

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

=(4.32*1.05)/(0.14-0.05)

=50.4

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

=3/1.14+3.6/1.14^2+4.32/1.14^3+50.4/1.14^3

=$42.34(Approx).