In: Finance
Marcel Co. is growing quickly. Dividends are expected to grow at a 19 percent rate for the next 3 years, with the growth rate falling off to a constant 7 percent thereafter. |
Required: |
If the required return is 12 percent and the company just paid a $1.90 dividend. what is the current share price? |
Options
$49.99
$56.32
$52.93
$55.21
$54.11
i | ii | iii | iv=i+iii | v | vi=iv*v | ||||
year | Dividend | Terminal value | Cash flow | PVIF @ 12% | present value | ||||
1 | 2.261 | =1.9*119% | 2.26 | 0.892857 | 2.02 | ||||
2 | 2.691 | =2.261*119% | 2.69 | 0.797194 | 2.14 | ||||
3 | 3.202 | =2.691*119% | 68.52 | 71.72 | 0.71178 | 51.05 | |||
4.95 | 55.21 | ||||||||
therefore price today = | 55.21 | ||||||||
ans = | 55.21 | ||||||||
Computation of terminal value = | =dividend in year 3/(required rate - growth rate) | ||||||||
=3.202*107%/(12%-7%) | |||||||||
68.52 |