Question

Jean's Fashions is growing quickly. Dividends are expected to grow at a 22 percent rate for the next 3 years, with the growth rate falling off to a constant 8 percent thereafter. The required return is 12 percent and the company just paid a $3.80 annual dividend. What is the current share price?

Answer 1

Answer:

Share price =$146.168

Explanation:

According to the dividend valuation model, the value of a stock is the present value of the expected future dividends from the stock discounted at the the required rate of return.

The required rate of return here is 12%

The dividend growth model a be applied to each of the years as appropriate.

The share price of Jean Fashion can be computed as follows:

Year            working                                Present value of Dividend            

1                 3.80 × (1.22) ×(1.12)^(-1) =             4.139

2                3.80× ((1.22)^2 × (1.12)^(-2) =          4.50

3                3.80×   (1.22)^3 × (1.12^(-3) =            4.91

4 to infinity    See workings                             132.60

Price of share(total PV)                                 $146.168

Share price =$146.168

Workings

PV in year 3 =3.80×   (1.22)^3 × (1.08)/(0.12-0.08)= 186.30

PV in year 0 = 186.30 × 1.12^(-3) = 132.608