Question

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 6.1 percent thereafter. The required return is 12 percent and the company just paid a dividend of $2.80.

What are the dividends each year for the next four years? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)

What is the share price in three years? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

What is the current share price?

Answer 1

Solution

Current Dividend(D0)=2.8

Divident in year 1(D1)=D0*(1+Growth rate)=2.8*(1+.31)=3.668=$3.67

Divident in year 2(D2)=D1*(1+Growth rate)=3.668*(1+.31)=4.80508=$4.81

Divident in year 3(D3)=D2*(1+Growth rate)=4.80508*(1+.31)=6.294655=$6.29

Divident in year 4(D4)=D3*(1+Growth rate)=6.294655*(1+.061)=6.678629=$6.68

Now Share price in three years=D4/(Required rate of return-Growth rate)

=6.678629/(.12-.061)=113.1971

Thus share price after 3 years=$113.20

Current share price

Current share price=Present value of dividends paid in first 3 years+Present value of share price after 3 years

Present value=Dividend/(1+r)^n

Where

r=required rate of return=12%

n=year of dividend

Current share price=D1/(1+r)^1+D2/(1+r)^2+D3/(1+r)^3+Share price after 3 years/(1+r)^3

=3.668/(1+.12)^1+4.80508/(1+.12)^2+6.294655/(1+.12)^3+113.1971/(1+.12)^3=92.15745

Current share price=$92.16

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