Question

Moody Farms just paid a dividend of $3.40 on its stock. The growth rate in dividends is expected to be a constant 5 percent per year indefinitely. Investors require a return of 13 percent for the first three years, a return of 11 percent for the next three years, and a return of 9 percent thereafter. What is the current share price

Answer 1

Answer:

$76.76.

Explanation:

The current share price of Moody Farms is $76.76. We use dividend growth model or Gordon Growth Model to calculate share price of Moody Farms. The formula of Dividend Discount Model is:

Po = [Do (1 + g) ] / (r - g)

Po = Current Share price

Do = Current dividend

r = Rate of return

g = growth of dividend

When investors return is 13% for 3 years,

Po = [ $3.40  ( 1 + 0.05 )^3 ] / (0.13 - 0.05 )

Po (1-3 years) = $30.40

Po (3-6 years) = [ $3.40  ( 1 + 0.05 )^6 ] / (0.11 - 0.05 )

= $41.61

Po (7 years and indefinitely) =$3.40  ( 1 + 0.05 )^7

= $4.78

The current share price for Moody Farms will be $30.40 + $41.61 + $4.78 = $76.76