Talcville Farms just paid a dividend of $3.32 on its stock. The growth rate in dividends...

Talcville Farms just paid a dividend of $3.32 on its stock. The growth rate in dividends is expected to be a constant 5.6% per year indefinitely. Investors require a 15.6% return on the stock for the first three years, a 13.6% return for the next three years, and an 11.6% return thereafter. What is the current share price?

Expert Solution

Price of Stock = PV of Cfs from it.

We can use Gordon formula only if the Ke & g are constant.

Div Calculation:

Year	CF	Formula	Calculation
1	$ 3.51	D0(1+g)	3.32*1.056
2	$ 3.70	D1(1+g)	3.51*1.056
3	$ 3.91	D2(1+g)	3.70*1.056
4	$ 4.13	D3(1+g)	3.91*1.056
5	$ 4.36	D4(1+g)	4.13*1.056
6	$ 4.60	D5(1+g)	4.36*1.056
7	$ 4.86	D6(1+g)	4.60*1.056

P6 = D7 / [ Ke - g ]

= 4.86 / [ 11.6% - 5.6% ]

= 4.86 / 6%

= $ 81.03

Price calculation TOday:

Year	CF	PVF	Disc CF	PVF Calculation
1	$ 3.51	0.8651	$ 3.03	1/1.156
2	$ 3.70	0.7483	$ 2.77	0.8651/1.156
3	$ 3.91	0.6473	$ 2.53	0.7483/1.156
4	$ 4.13	0.5698	$ 2.35	0.6473/1.136
5	$ 4.36	0.5016	$ 2.19	0.5698/1.136
6	$ 4.60	0.4416	$ 2.03	0.5016/1.136
6	$ 81.03	0.4416	$ 35.78	0.5016/1.136
Price Today	$ 50.69

jeff jeffy answered 1 year ago

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