Question

Yang Corp. is growing quickly. Dividends are expected to grow at a rate of 22 percent for the next three years, with the growth rate falling off to a constant 5 percent thereafter. Required: If the required return is 15 percent and the company just paid a $2.50 dividend, what is the current share price? (Hint: Calculate the first four dividends.) (Do not round intermediate calculations. Round your answer to 2 decimal places fec.. 32.16).)

Answer 1

D1=(2.5*1.22)=3.05

D2=(3.05*1.22)=3.721

D3=(3.721*1.22)=4.53962

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

=(4.53962*1.05)/(0.15-0.05)

=47.66601

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

=3.05/1.15+3.721/1.15^2+4.53962/1.15^3+47.66601/1.15^3

=$39.79(Approx).