A fast growth share has the first dividend (t=1) of $2.35. Dividends are then expected to...

A fast growth share has the first dividend (t=1) of $2.35. Dividends are then expected to grow at a rate of 8 percent p.a. for a further 3 years. It then will settle to a constant-growth rate of 3.0 percent. . If the required rate of return is 14 percent, what is the current price of the share? (to the nearest cent)

Select one:

a. $24.03

b. $53.84

c. $21.36

d. $26.44

Expert Solution

D1=2.35

D2=(2.35*1.08)=2.538

D3=(2.538*1.08)=2.74104

D4=(2.74104*1.08)=2.9603232

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

=(2.9603232*1.03)/(0.14-0.03)

=27.71939

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

=2.35/1.14+2.538/1.14^2+2.74104/1.14^3+2.9603232/1.14^4+27.71939/1.14^4

=$24.03(Approx)

jeff jeffy answered 2 years ago

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