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Moody Farms just paid a dividend of $3.50 on its stock. The growth rate in dividends...

Moody Farms just paid a dividend of $3.50 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?

Expert Solution

Dividend₀ (D₀) = $3.50

Growth rate = 5% p.a.

Dividendat the end of year 7 (D₇) = $3.50 x (1+5%)⁷ = $ 4.925

Required Returns after year 6 = 9% p.a.

Using Gordon's dividend growth model,

Terminal value of dividends receivable after year 6 at the end of year 6 = D₇ / (ke-g) = 4.925 / (9%-5%) = $123.125

Therefore value of share:

Year	Dividend	PVF	PV
1	3.675	0.885	3.25
2	3.859	0.783	3.02
3	4.052	0.693	2.81
4	4.254	0.624	2.66
5	4.467	0.562	2.51
6	4.690	0.507	2.38
Terminal value 6	123.125	0.507	62.39
	Price of share		79.02

PVF is calculated using 13% for 1st 3 years and then 11% for next 3 years

PV for year 1 = 1/1.13

PV for year 2 = 1/1.13²

PV for year 3 = 1/1.13³

PV for year 4 = 1/(1.13³ x 1.11)

PV for year 5 = 1/(1.13³ x 1.11²)

PV for year 6 = 1/(1.13³ x 1.11³)

Thumbs up please if satisfied. Thanks :)

jeff jeffy answered 1 year ago

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