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Jet Co. is growing quickly. Dividends are expected to grow at a 18 percent rate for...

Jet Co. is growing quickly. Dividends are expected to grow at a 18 percent rate for the next 3 years, with the growth rate falling off to a constant 6 percent thereafter.

If the required return is 11 percent and the company just paid a $3.60 dividend, what is the current share price?

Solutions

Expert Solution

Step 1: Computation of market price at the end of year 3 using Gordon Growth Model

P3 = D4 / (Ke – g)

Where,

P3 - Market price at the end of year 3 = ?

D4 - Expected dividend in year 4 = 3.60*1.18^3*1.06 = 6.269810112

Ke – Cost of equity = 11%

G – Growth rate in dividend = 6%

P3 = 6.269810112/(.11-.06)

= 6.269810112/.05

= 125.39620224

Step 2: Computing current share price by discounting the cashflow at required return

Year Dividend PVF@11% Present Value (Cashflow*PVF)
1 4.24800000            0.901 3.83
2 5.01264000            0.812 4.07
3 131.31111744(5.01264*1.18+125.39620224)            0.731 96.01

current share price = Cashflow*PVF

= 3.83+4.07+96.01

= $103.91

You can use the equation 1/(1+i)^n to find PVF using calculator

Formula to calculate PV in excel is as follows "=PV(interest rate,Year,0,cashflow)"

jeff jeffy answered 2 years ago
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