south sea corporation is expected to increase dividends at 9 percent rate each year over the...

south sea corporation is expected to increase dividends at 9 percent rate each year over the next three years. afterward, the company pledges to maintain a constant 3 percent growth rate in dividend forever. if the require return on the stock is 10 percent, what is the current share price given the company's most recent dividend was $1.

Expert Solution

First we compute the dividends with 9% growth rate in years 1,2 and 3 and 3% rate in Year 4

Year	Dividend
1	1.09
2	1.1881
3	1.295029
4	1.33388

The horizon value at end of year 3 =P3=D4/(R-g)

= 1.33388/ (10%-3%)

=

19.05543

The current share price = D1/(1+k)+ D2/(1+k)^2 + (D3+P3) /(1+k)^3

= 17.26

WORKINGS

jeff jeffy answered 1 year ago

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