Yang Corp. is growing quickly. Dividends are expected to grow at a rate of 29 pe
ID: 2623156 • Letter: Y
Question
Yang Corp. is growing quickly. Dividends are expected to grow at a rate of 29 percent for the next three years, with the growth rate falling off to a constant 6.8 percent thereafter.
If the required return is 15 percent and the company just paid a $3.15 dividend, what is the current share price? (Hint: Calculate the first four dividends.) (Do not round intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).)
Required:If the required return is 15 percent and the company just paid a $3.15 dividend, what is the current share price? (Hint: Calculate the first four dividends.) (Do not round intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).)
Explanation / Answer
Dividend after year 1 (D1) = 3.15 * (1+29%) = 4.0635
Dividend after year 2 (D2) = 4.0635 * (1+29%) = 5.241915
Dividend after year 3 (D3) = 5.241915 * (1+29%) = 6.76207
Dividend after year 3 (D4) = 6.76207 * (1+6.8%) = 7.221891
Price after year 3 (P3) = D3 / (15%-6.8%) = 88.07184
Current price = D1 / 1.15 + D2 / 1.15^2 + D3 / 1.15^3 + P3 / 1.15^3 = 4.0635/1.15 + 5.241915/1.15^2 + 6.76207/1.15^3 + 88.07184/1.15^3 = $ 69.85
Answer: $ 69.85
Hope this helped ! Let me know in case of any queries.
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