Moody Farms just paid a dividend of $3.75 on its stock. The growth rate in dividends...

Moody Farms just paid a dividend of $3.75 on its stock. The growth rate in dividends is expected to be a constant 5 percent per year indefinitely. Investors require a return of 13 percent for the first three years, a return of 11 percent for the next three years, and a return of 9 percent thereafter. What is the current share price? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Expert Solution

Step 1 - Calculation of dividend for year 1-6 at a growth rate of 5%

Year	Dividend
1	3.94
2	4.13
3	4.34
4	4.56
5	4.79
6	5.03

Step 2 - Share price at the end of 6th Year

To calculate share price at the end of 6th year we will calculate the present value of all the dividends after 6 years

Stock price at the end of year 6 (S6) = D6*(1+g) / Re - g

S6 = 5.03*1.05 / 0.09 - 0.05

S6 = 5.28 / 0.04 = 131.92

Step 3 - Now we will calculate the Stock price (S3) at the end of year 3 by discounting the value of dividend from year 4-6 and S6 at the end of year 3 using 11% as discount rate

Year	Particulars	Cash Flow	Discounted Value at end of Year 3 @11%
4	Dividend	4.56	4.11
5	Dividend	4.79	3.88
6	Dividend	5.03	3.67
6	Stock Price (S6)	131.92	96.46
	Stock Price (S3)		108.12

Step 4 - Now we will calculate the Stock price at year 0 by discounting the value of dividend from year 1-3 and S3 using 13% as discount rate

Year	Particulars	Cash Flow	Present Value using 13% discount rate
1	Dividend	3.94	3.48
2	Dividend	4.13	3.24
3	Dividend	4.34	3.01
3	Stock Price (S3)	108.12	74.93
	Stock Price today		84.66

Stock Price today = 84.66

jeff jeffy answered 1 year ago

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