Question

Burton Corp. is growing quickly. Dividends are expected to grow at a rate of 32 percent for the next three years, with the growth rate falling off to a constant 7.2 percent thereafter If the required return is 14 percent and the company just paid a dividend of $3.35, what is the current share price? (Hint Calculate the first four dividends.) (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) Current share price

Answer 1

D1=(3.35*1.32)=4.422

D2=(4.422*1.32)=5.83704

D3=(5.83704*1.32)=7.7048928

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

=(7.7048928*1.072)/(0.14-0.072)

=$121.4653688

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

=4.422/1.14+5.83704/1.14^2+7.7048928/1.14^3+$121.4653688/1.14^3

which is equal to

=$95.56(Approx).