Yang Corp. is growing quickly. Dividends are expected to grow at a rate of 32 pe
ID: 2773773 • Letter: Y
Question
Yang Corp. is growing quickly. Dividends are expected to grow at a rate of 32 percent for the next three years, with the growth rate falling off to a constant 6.7 percent thereafter.
If the required return is 14 percent and the company just paid a $3.10 dividend, what is the current share price? (Hint: Calculate the first four dividends.) (Do not round intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).)
Yang Corp. is growing quickly. Dividends are expected to grow at a rate of 32 percent for the next three years, with the growth rate falling off to a constant 6.7 percent thereafter.
Explanation / Answer
We have:
Current Dividend Do = 3.10
D1 = 3.10x(1+0.32) = 4.092
D2 = 4.092x((1+0.32)) =5.40
D3 =5.40x(1+0.32) =7.13
Now we need to compute price at the end of year 3:
P3 = D3(1+g)/ (Ke-g)
= 7.13 x(1+0.067)/(0.14-0.067)
= 7.61/0.073
=104.25
Now we need to discount all the dividends and future prices to calculate current stock price:
year
Cash flow
PV factor 14%
PV
1
4.092
0.8772
3.59
2
5.4
0.7695
4.16
3
7.13+104.25
0.6750
75.18
82.92
Hence, current price of the stock is 82.92.
year
Cash flow
PV factor 14%
PV
1
4.092
0.8772
3.59
2
5.4
0.7695
4.16
3
7.13+104.25
0.6750
75.18
82.92
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