Question

Anicex 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 5 percent thereafter. If the required return is 14 percent and the company just paid a dividend of $2.50, what is the current share price?

Options available:

a.$66.21

b.

$51.87

c.

$42.34

d.

$86.52

Answer 1

c. $42.34

As per dividend discount model, current share price is the present value of dividends.
Step-1:Calculation of present value of dividend of next 3 years
Year	Dividend	Discount factor	Present value
a	b	c=1.14^-a	d=b*c
1	$       3.00	0.877193	$       2.63
2	$       3.60	0.769468	$       2.77
3	$       4.32	0.674972	$       2.92
Total			$       8.32
Working:
Dividend of Year :
1	$       2.50	x	1.20	=	$       3.00
2	$       3.00	x	1.20	=	$       3.60
3	$       3.60	x	1.20	=	$       4.32
Step-2:Calculation of present value of dividends of after year 3
Present value		=	D3*(1+g)/(K-g)*DF3			Where,
		=	$    34.02			D3	$       4.32
						g	5%
						K	14%
						DF3	0.674972
Step-3:Calculation of present value of future dividends
Present value of future dividends		=	$       8.32	+	$    34.02
		=	$    42.34