Question

Supernormal Growth Rizzi Co. is growing quickly. Dividends are expected to grow at a 25 percent rate for the next three years, with the growth rate falling off to a constant 7 percent thereafter. If the required return is 13 percent and the company just paid a $3.10 dividend, what is the current share price?

Answer 1

Answer:

$86.13

Explanation:

The computation of the current share price is shown below:

Given that

Dividend just Paid (D0) is $3.10        

and Required Return (R ) 13%

Now        

Dividend Paid in 1st year  = $3.10 (1.25)    = $3.875        

Dividend Paid in 2ndyear = $3.875 (1.25)   = $4.844        

Dividend Paid in3rd year = $4.844 (1.25)  = $6.055        

Dividend Paid in 4th year  = $6.055 (1.07)   = $6.47

Now        

Stock Price in 3rd year (P3) = D4 ÷ (R - g)        

= $6.47 ÷ (0.13- 0.07)        

= $107.83        

Now the Current Share Price(P0) is        

Current Share Price (P0) = $3.875 ÷ (1.13) + $4.844 ÷ (1.13)^2 + $6.055 ÷ (1.13)^3 + $107.83 ÷ (1.13)^3    

= $3.42 +$3.79 + $4.19 + $74.73      

= $86.13