Question

Janicex co is growing quickly. dividends are expected to grow at a rate of 20 percent for the next three years, with 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?

Answer 1

Step 1: Find D₁, D₂, D₃, and D₄.

Dn= Dividend in year n

D₀ = $2.50 (given)

D1 = D0 + g

g = growth rate

D1 = $2.50 + (20% * 2.50)
= $2.50 + 0.5
=$3.00

D2 = $3.00 + (20% * 3)
= $3.60

D3 = 3.60 + (20% * 3.6)
= $4.32

D4 = $4..32 + (5% * 4.32)
= $4.536

Step 2: Find the share price in year 3.

Where,
V3 = Share price in year 3
D4 = Expected dividend in year 4
R = Required rate of return
g = Dividend growth rate

Therefore,

Step 3: Find the present value of D1, D2, D3, and V3. Sum total of these will be the current share price.

Therefore, the current price of the stock is $42.34