Question

Duffs Co. is growing quickly. Dividends are expected to grow at a 24% rate for the next three years, with the growth rate falling off to a constant 6% thereafter. If the required return is 11% and the company just paid a $1.90 dividend, what is the current share price?

Answer 1

Based on the fact that Duffs Co. dividends grow at 24% for three years and then 6%, the current share price of the company is $63.29.

What is Duffs Co. current price?

First, find the price of the stock in year 3 when the stock grows at 6%:

= (1.90 x 1.24³ x 1.06) / (0.11 - 0.06)

= $76.79

This amount is the terminal value. You are to take the present value of this amount along with the present value of the dividends up to year 3:

= ((1.90 x 1.24) / 1.11) + ((1.90 x 1.24²) / 1.11²) + ((1.90 x 1.24³) / 1.11³) + 76.79 / 1.11³

= $63.29

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