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

	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

	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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