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Energy Console is a new alternative energy company that is expected to experience short-term supernormal dividend...

Energy Console is a new alternative energy company that is expected to experience short-term supernormal dividend growth rates of 50% in year 1, 40% in year 2 and 25% in year 3. After 3 years of supernormal growth, this company dividend is expected to grow at a constant rate of 5%. However, today due to the volatility in the technology stocks, analysts have made downward projection on its short-term growth rates to 15% in year 1, 10% in year 2 and 8% in year 3 and long-term constant growth rate of 5% due to uncertainty of the world economy. If the most recent dividend paid is $2 per share and its required return remains at 15%, approximately how much do you expect the change in Energy Console’s stock price per share today (indicate increase or decrease and show your calculation steps)?

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Expert Solution

Share price before
Year Growth rate Dividend computation Dividend PV factor @15%, 1/(1+r)^time Dividend * PV factor
1 50.00% 2*(1+50%) $     3.00                    0.8696 $        2.61
2 40.00% 3*(1+40%) $     4.20                    0.7561 $        3.18
3 25.00% 4.2*(1+25%) $     5.25                    0.6575 $        3.45
3 $   55.13                    0.6575 $      36.25
Current share price $      45.48
Current Dividend $         5.25
Rate of return 15.00%
Growth Rate 5.00%
Share Price at the horizon i.e. T3 =Current Dividend*(1+Growth rate)/(Rate of return-Growth Rate)
Share Price at the horizon i.e. T3 =5.25*(1+0.05)/(0.15-0.05)
Share Price at the horizon i.e. T3 $       55.13
Current share price $       45.48 FROM above table
Share price after
Year Growth rate Dividend computation Dividend PV factor @15%, 1/(1+r)^time Dividend * PV factor
1 15.00% 2*(1+15%) $     2.30                    0.8696 $        2.00
2 10.00% 2.3*(1+10%) $     2.53                    0.7561 $        1.91
3 8.00% 2.53*(1+8%) $     2.73                    0.6575 $        1.80
3 $   28.69                    0.6575 $      18.86
Current share price $      24.57
Current Dividend $         2.73
Rate of return 15.00%
Growth Rate 5.00%
Share Price at the horizon i.e. T3 =Current Dividend*(1+Growth rate)/(Rate of return-Growth Rate)
Share Price at the horizon i.e. T3 =2.7324*(1+0.05)/(0.15-0.05)
Share Price at the horizon i.e. T3 $       28.69
Current share price $       24.57 FROM above table
Current share price $       45.48 Share price before
Increase/(decrease) in price $     (20.91)

jeff jeffy answered 1 year ago
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