Question

Janicex Co. is growing quickly. Dividends are expected to grow at ______62__ percent for the next three years.The growth rate will be 8 percent in year 4 and the growth rate will fall off to a constant 6 percent thereafter. If the required return is 11 percent, and the company just paid a dividend of $1.90, what is the current share price?

Answer 1

Step-1, Calculation of Dividend per share for the next 4 years

Dividend in Year 0 (D0) = $1.90

Dividend in Year 1 (D1) = $3.0780 [$1.90 x 162%]

Dividend in Year 2 (D2) = $4.9864 [$3.0780 x 162%]

Dividend in Year 3 (D3) = $8.0779 [$4.9864 x 162%]

Dividend in Year 4 (D4) = $8.7241 [$8.0779 x 108%]

Step-2, Calculation of Stock Price for the Year 4 (P4)

Stock Price for the Year 4 = D4(1 + g) / (Ke – g)

= $8.7241(1 + 0.06) / (0.11 – 0.06)

= $9.2476 / 0.05

= $184.95 per share

Step-3, Current Share Price

As per Dividend Discount Model, the Value of the Stock is the aggregate of the Present Value of the future dividend payments and the present value the stock price for the year 4

Year	Cash flow ($)	Present Value Factor (PVF) at 11.00%	Present Value of cash flows ($) [Cash flows x PVF]
1	3.0780	0.90090	2.77
2	4.9864	0.81162	4.05
3	8.0779	0.73119	5.91
4	8.7241	0.65873	5.75
4	184.95	0.65873	121.83
TOTAL	140.31

Therefore, the Current share price will be $140.31

NOTE

The Formula for calculating the Present Value Factor is [1/(1 + r)ⁿ], Where “r” is the Discount/Interest Rate and “n” is the number of years.