Taylor
Corp. is growing quickly. Dividends are expected to grow at a 28
percent rate for the next three years, with the growth rate falling off
to a constant 7.9 percent thereafter.
| Required: |
|
If the required return is 16 percent and the company just paid a $3.70 dividend, what is the current share price? (Hint: Calculate the first four dividends.) (Do not include the dollar sign ($). Round your answer to 2 decimal places (e.g., 32.16).)
|
| Current share price | $ |
Explanation:
|
With
supernormal dividends, we find the price of the stock when the
dividends level off at a constant growth rate, and then find the present
value of the future stock price, plus the present value of all
dividends during the supernormal growth period. The stock begins
constant growth after the third dividend is paid, so we can find the
price of the stock in Year 3, when the constant dividend growth begins
as:
|
| P3 = D3 (1 + g2) / (R – g2) |
| P3 = D0 (1 + g1)3 (1 + g2) / (R – g2) |
| P3 = $3.70(1.28)3(1.079) / (0.16 – 0.079) |
| P3 = $103.36 |
|
The
price of the stock today is the present value of the first three
dividends, plus the present value of the Year 3 stock price. The price
of the stock today will be:
|
| P0 = $3.70(1.28) / 1.16 + $3.70(1.28)2/ 1.162 + $3.70(1.28)3/ 1.163 + $103.36 / 1.163 |
| P0 = $79.78 |
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