Question

Hughes Co. is growing quickly. Dividends are expected to grow at a 15.8 % rate for the next three years, with the growth rate falling off to a constant 3.1 % thereafter.

If the required return is 8.4 % and the company just paid a $1.69 dividend, what is the current share price? (Round answer to 2 decimal places. Do not round intermediate calculations).

Answer 1

Year	Growth rate	Dividend computation	Dividend	PV factor @8.4%, 1/(1+r)^time	Dividend * PV factor
1		1.69*(1+15.8%)	$     1.96	0.9225	$        1.81
2	15.80%	1.96*(1+15.8%)	$     2.27	0.8510	$        1.93
3	15.80%	2.27*(1+15.8%)	$     2.62	0.7851	$        2.06
3			$   51.05	0.7851	$      40.08
				Current share price	$      45.87
Current Dividend	$         2.62
Rate of return	8.40%
Growth Rate	3.10%
Share Price at the horizon i.e. T3	=Current Dividend*(1+Growth rate)/(Rate of return-Growth Rate)
Share Price at the horizon i.e. T3	=2.62429336728*(1+0.031)/(0.084-0.031)
Share Price at the horizon i.e. T3	$       51.05
Current share price	$       45.87	FROM above table