Question

Church Inc. is presently enjoying relatively high growth because of a surge in the demand for its new product. Management expects earnings and dividends to grow at a rate of 2.8% for the next 4 years, after which competition will probably reduce the growth rate in earnings and dividends to zero, i.e., g = 0. The company’s most recent dividend, D0, was $2.69, and its required rate of return is 15%. What is the current price of the common stock?

Answer 1

D1=(2.69*1.028)=2.76532

D2=(2.76532*1.028)=2.84274896

D3=(2.84274896*1.028)=2.92234593

D4=(2.92234593*1.028)=3.00417162

Value after year 4=(D4*Growth rate)/(Required return-Growth rate)

=3.00417162/0.15

=20.0278108

Hence current price=Future dividend and value*Present value of discounting factor(rate%,time period)

=2.76532/1.15+2.84274896/1.15^2+2.92234593/1.15^3+3.00417162/1.15^4+20.0278108/1.15^4

=$19.64(Approx)