Question

Marcel Co. is growing quickly. Dividends are expected to grow at a 21 percent rate for the next 3 years, with the growth rate falling off to a constant 5 percent thereafter. Required: If the required return is 12 percent and the company just paid a $3.80 dividend. what is the current share price? (Do not round your intermediate calculations.)

Answer choices:

$86.91

$77.51

$83.50

$85.21

$80.42

Answer 1

Current Dividend (at the end of Year 0) = $ 3.8

The company will grow (so will the dividend) at a high rate of 21 % per annum for three years post which the growth rate will fall to a moderate 5 % per annum.

Required Return Rate = 12 %

The stock price will be fairly represented by the summed present value of the asset's (stock's) expected future cash flows(in the form of dividends) discounted at the stockholder's required return rate.

Year 1 Dividend = 3.8 x 1.21 = $ 4.598

Year 2 Dividend = 4.598 x 1.21 = $ 5.56358

Year 3 Dividend = 5.56358 x 1.21 = $ 6.7319318

Year 4 Dividend = 6.7319318 x 1.05 = $ 7.06852839

Terminal Value of Perpetually Growing Dividend at the end of Year 3 = Year 4 Dividend / (Required Return Rate - Perpetual Growth Rate) = 7.06852839 / (0.12 - 0.05) = $ 100.978977

PV of Terminal Value of Perpetual Growth Dividends = P1 = 100.978977 / (1.12)^(3) = $ 71.87484127

PV of High Growth Phase Dividend = P2 = 4,598 / 1.12 + 5.56358 / (1.12)^(3) + 6.7319318 / (1.12)^(3) = $ 13.33226514

Current Stock Price = P1+P2 = 71.87484127 + 13.33226514 = $ 85.207 or 85.21 approximately.

Hence, the correct option is (d).