Question

Giant Film Company just paid a quarterly dividend of $3 per share yesterday, and has a required return of 12 percent per year. Please answer the following questions:

a. If Giant Film’s future dividends are expected to stay at $3 per quarter forever, what should Giant Film’s current stock price be?

b. If Giant Film’s future dividends are expected to grow at 2% per quarter from now on, and its EPS will stay at $6 per quarter in the foreseeable future, what’s Giant Film’s current stock price?

c. If Giant Film’s future dividends are expected to grow at 10% in the first quarter, 20% in the second quarter, and then turn into a 2% per quarter constant growth rate. What’s Giant Film’s current stock price?

Answer 1

a) Calculation of current price
Dividend= $3
Required return= 12/4= 3%
Price= D1/required return
=3/0.03= 100
Current price is $100
b) Calculation of current price
D1= D0*(1+growth)= 3*(1+0.02)= 3.06
Growth= 2%
Required return= 12/4= 3%
Price= D1/(required return-growth)
Price= 3.06/(0.03-0.02)
Price= 3.06/0.01=306
Current price is $306
c) Calculation of current price
Quarter	Cashflows	PVF @3%	Present value
1	3.30	0.971	3.20
2	3.96	0.943	3.73
2	403.92	0.943	380.90
Total			387.83
Current price is $387.83
Working:
Dividend at quarter 1= 3*(1+0.10)= $3.30
Dividend at quarter 2= 3.30*(1+0.20)= $3.96
Terminal value= Dividend(1+growth)/(return-growth)
=3.96*(1+0.02)/(0.03-0.02)= 403.92