Talcville Farms just paid a dividend of $3.36 on its stock. The growth rate in dividends...

Talcville Farms just paid a dividend of $3.36 on its stock. The growth rate in dividends is expected to be a constant 5.8% per year indefinitely. Investors require a 15.8% return on the stock for the first three years, a 13.8% return for the next three years, and an 11.8% return thereafter. What is the current share price? (Do not round intermediate calculations. Round the final answer to 2 decimal places. Omit $ sign in your response.)

Expert Solution

Here dividend 0 is $ 3.36 given

Dividend 1 =3.36* 1.058 = 3.55488 , PV 1= 1/ (1.158)

Dividend 2 =3.55488* 1.058 = 3.761063 , PV 2= 1/ (1.158)^2

Dividend 3 =3.761063* 1.058 = 3.979205 , PV 3= 1/ (1.158)^3

Dividend 4 =3.979205 * 1.058 = 4.209999 , PV 4= 1/ [ (1.158)^3 * 1.138 ]

Dividend 5 =4.209999 * 1.058 = 4.454178 , PV 5= 1/ [ (1.158)^3 * (1.138)^2 ]

Dividend 6 =4.454178 * 1.058 = 4.712521 , PV 6= 1/ [ (1.158)^3 * (1.138)^3 ]

Dividend 7 =4.712521 * 1.058 = 4.985847 , PV 7= 1/ [ (1.158)^3 * (1.138)^3 * 1.118]

Dividend 8 =4.985847 * 1.058 = 5.275026 ... ( We require Dividend 8 only to calculate the terminal value as per dividend growth model)

Terminal value = Dividend 8/ ( Required rate - growth rate)= 5.275026 / (0.118 - 0.058)= 87.9171

The current share price calculations are shown below :

Period	Cash flow(CF)	Present value factor (PV)	*CF PV**
Dividend 1	3.55488	0.863558	3.069845
Dividend 2	3.761063	0.745732	2.804746
Dividend 3	3.979205	0.643983	2.56254
Dividend 4	4.209999	0.56589	2.382396
Dividend 5	4.454178	0.497267	2.214917
Dividend 6	4.712521	0.436966	2.059211
Dividend 7	4.985847	0.390846	1.948699
Dividend 8	5.275026
Terminal value at year 7	87.9171	0.390846	34.36205
Total	51.40441

the current share price is 51.40 (Answer)

jeff jeffy answered 1 year ago

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