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 7.1 percent thereafter. If the required return is 12 percent and the company just paid a dividend of $2.55, 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

Answer 1

D1=(2.55*1.31)=3.3405

D2=(3.3405*1.31)=4.376055

D3=(4.376055*1.31)=5.73263205

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

=(5.73263205*1.071)/(0.12-0.071)

=125.298958

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

=3.3405/1.12+4.376055/1.12^2+5.73263205/1.12^3+125.298958/1.12^3

=$99.74(Approx).