Question

Phillips Co. is growing quickly. Dividends are expected to grow at a rate of 20 percent for the next three years, with the growth rate falling off to a constant 8 percent thereafter. If the required return is 11 percent and the company just paid a dividend of $1.45, what is the current share price

Answer 1

Answer:

$69.47

Explanation:

D1 = ($1.45*1.20) = $1.7

D2 = ($1.7*1.20) = $2.04

D3 = ($2.04*1.20) = $2.45

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

Value after year 3 = ($2.45*1.08) / 0.11-0.08

Value after year 3 = $2.646 / 0.03

Value after year 3 = $88.20

Current share price = Future dividend and value*Present value of discounting factor(rate%,time)

Current share price = $1.7/1.11 + $2.04/(1.11)^2 + $2.45/(1.11)^3 + $88.20/(1.11)^3

Current share price = $1.5315315 + $1.65571 + $1.7914189 + $64.49107

Current share price = $69.4697304

Current share price = $69.47