Question

The Timberlake Orchard Co just paid a dividend of $7 per share. The dividend is expected to grow at a rate of 5% for the next three years. In year four and five it will grow at a rate of 4% per year. The growth rate of dividend is expected to be constant 6 percent indefinitely from year six. The required rate of return is 13 percent.
What is the current share price? (Show all your computations)

Rubrics:
1. Correct dividend for all years
2. Correct present value of dividends for all years
3. Correct total present value of all dividends
4. Correct price in the year 5 (P5)  
5. Correct Po

Answer 1

Given,

Current dividend (D0) = $7

First growth rate (g1) = 5% or 0.05

Second growth rate (g2) = 4% or 0.04

indefinite growth rate (g3) = 6% or 0.06

Required return (r) = 13% or 0.13

Solution :-