Question

McCullough Pet Supplies, Inc., is a young start-up company. No dividends will be paid on the stock over the next nine years, because the firm needs to plow back its earnings to fuel growth. The company will then pay a dividend of $15 per share 10 years from today and will increase the dividend by 5 percent per year thereafter.

Required:

If the required return on this stock is 14 percent, what is the current share price? (Do not round intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).)

Current share price	$

Stauber Corporation is expected to pay the following dividends over the next four years: $3, $10, $15, and $3.08. Afterwards, the company pledges to maintain a constant 5 percent growth rate in dividends, forever.

Required:

If the required return on the stock is 11 percent, what is the current share price? (Do not round intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).)

Current Share Price: $

Young Corp. is growing quickly. Dividends are expected to grow at a rate of 25 percent for the next three years, with the growth rate falling off to a constant 6 percent thereafter.

Required:

If the required return is 13 percent and the company just paid a $2.50 dividend, what is the current share price? (Hint: Calculate the first four dividends.) (Do not round intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).)

Answer 1

Question 1

Step 1: Computation of market price at the end of year 10 using Gordon Growth Mdel

P10 = D11/ (Ke-g)

= (15*1.05) / (.14-.05)

= 15.75 / .09

= $175

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

Year	Dividend	PVF/PVAF@14%	Present Value (Cashflow*PVF)
1-9	0	4.946	0.00
10	190 (15+175)	0.27	51.30

current share price = $51.30 (0+51.30)

Question 2

Step 1: Computation of market price at the end of year 4 using Gordon Growth Mdel

P4 = D5 / (Ke-g)

= (3.08*1.05) / (.11-.05)

= 3.234 / .06

= $53.90

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

Year	Dividend	PVF@11%	Present Value (Cashflow*PVF)
1	3	0.901	2.70
2	10	0.812	8.12
3	15	0.731	10.97
4	56.98 (3.08+53.9)	0.659	37.55

current share price = $59.34 (2.70+8.12+10.97+37.55)

Question 3

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

P3 = D4/ (Ke-g)

= (2.5*1.25³*1.06) / (.13-.06)

= 5.1758 / .07

= $73.94

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

Year	Dividend	PVF@13%	Present Value (Cashflow*PVF)
1	3.125	0.885	2.77
2	3.906	0.783	3.06
3	78.823 (3.906*1.25+73.94)	0.693	54.62

current share price = $60.45 (2.77+3.06+54.62)