Question

Chamberlain Corporation is expected to pay the following dividends over the next four years: $13.70, $9.70, $8.70, and $4.20. Afterward, the company pledges to maintain a constant 4% growth rate in dividends forever. If the required return on the stock is 12%, what is the current share price? (Do not round intermediate calculations. Round the final answer to 2 decimal places. Omit $ sign in your response.)

Current share price [ ]

Answer 1

This question is based on multiple period dividend discount model.

Step 1 - Calculation of explicit forecast period

Stage 2- Beyond 4 years
Expected dividend for the 5th year i.e. D5 = D4 * (1+g). Growth rate now is 4%.

= 4.20 * (1+0.04)

= 4.20 * 1.04

= 4.368

Horizon Price i.e. P4 = D5 / (Re-g)

Re is 12% or 0.12

g is 4% or 0.04

Therefore

= 4.368 / (0.12 - 0.04)

= 4.368 / 0.08

= 54.6

Present Value of P4 = $54.6  * 0.6355180784

= 34.6992871

Current share price = Stage 1 + Stage 2
= 28.82658755 + 34.6992871
= 63.5258747

Rounding to two decimal places

= 63.53

The current share price is 63.53

Note - How did we calculate the discounting factors @12%
Year 1 = 1/1.12
= 0.8928571429
Year 2 = 0.8928571429 / 1.12
= 0.7971938776
Year 3 = 0.7971938776 / 1.12
= 0.7117802478

Year 4 = 0.7117802478 / 1.12
= 0.6355180784