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Aspen Australia Pty Ltd is a fast-growing drug company. The company forecasts that in the next...

Aspen Australia Pty Ltd is a fast-growing drug company. The company forecasts that in the next 3 years its growth rates will be 30 per cent, 28 per cent and 24 per cent, respectively. Last week it declared a dividend of $1.67. After 3 years, the company expects a more stable growth rate of 8 per cent for the next several years. The required rate of return is 14 per cent.

a Calculate the dividends for the next 3 years, and find its present value.

b Calculate the price of the share at the end of year 3, when the company settles to a constant growth rate.


c What is the current price of the share?

Solutions

Expert Solution

a

Required rate= 14.00%
Year Previous year dividend Dividend growth rate Dividend current year Total Value Discount factor Discounted value
1 1.67 30.00% 2.171 2.171 1.14 1.9044
2 2.171 28.00% 2.77888 2.77888 1.2996 2.13826
3 2.77888 24.00% 3.4458112 3.4458112 1.481544 2.32582
PV of dividends Sum of discounted value = 6.37
Where
Current dividend =Previous year dividend*(1+growth rate)^corresponding year
Total value = Dividend for the year
Discount factor=(1+ Required rate)^corresponding period
Discounted value=total value/discount factor

b

Required rate= 14.00%
Year Previous year dividend Dividend growth rate Dividend current year Horizon b. value Total Value Discount factor Discounted value
1 1.67 30.00% 2.171 2.171 1.14 1.9044
2 2.171 28.00% 2.77888 2.77888 1.2996 2.13826
3 2.77888 24.00% 3.4458112 b. 62.025 65.4708112 1.481544 44.19093
Long term growth rate (given)= 8.00% c. Value of Stock = Sum of discounted value = 48.23
Where
Current dividend =Previous year dividend*(1+growth rate)^corresponding year
Total value = Dividend + horizon value (only for last year)
Horizon value = Dividend Current year 3 *(1+long term growth rate)/( Required rate-long term growth rate)
Discount factor=(1+ Required rate)^corresponding period
Discounted value=total value/discount factor

jeff jeffy answered 1 year ago
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