1. Janicex Co. is growing quickly. Dividends are expected to grow at a rate of 2

Question

1. Janicex Co. is growing quickly. Dividends are expected to grow at a rate of 25 percent for the next three years, with the growth rate falling off to a constant 4 percent thereafter. If the required return is 10 percent and the company just paid a dividend of $2.95, what is the current share price? (Round your answer to 2 decimal places. (e.g., 32.16))

2. Feeback Corporation stock currently sells for $78 per share. The market requires a return of 9.4 percent on the firm

1. Janicex Co. is growing quickly. Dividends are expected to grow at a rate of 25 percent for the next three years, with the growth rate falling off to a constant 4 percent thereafter. If the required return is 10 percent and the company just paid a dividend of $2.95, what is the current share price? (Round your answer to 2 decimal places. (e.g., 32.16))

Explanation / Answer

Solution-1

D1 = 2.95*1.25 = 3.69

D2 = D1*1.25 = 4.60

D3 = D2*1.25=5.76

P3 = D4/(R-g) = 1.04*5.76/ (.10-.04) = 99.84

Enter these cash flows in your calculator and compute NPV:

cf1=3.69, cf2=4.60, cf3=5.76+99.84

npv = 79.80

Current share price=79.80 (Approx)

Solution-2

Gordon growth model P=D(1+g)/(k-g) where

Stock price (P) $78

D is most recent dividend

Dividend growth rate (g) 2.7%

Required return (k) 9.4%

D=P (k-g)/ (1+g)

D=78(0.094-0.027) / (1+0.027)

D=5.226 / 1.027

Dividend paid per share (D) =$5.088

Solution-3

We know the stock has a required return of 11 percent, and the dividend and capital gains yield are equal, so:

Dividend yield = 1/2(0.11)
Dividend yield = .055 = Capital gains yield

Now we know both the dividend yield and capital gains yield. The dividend is simply the stock price times the dividend yield, so:

D1 = .055($68)

D1= $3.74

This is the dividend next year. The question asks for the dividend this year. Using the relationship between the dividend this year and the dividend next year:

D1 = D0(1 + g)

3.74=D0(1 +.055)

D0=3.74 / 1.055

D0 =$3.54

Current dividend per share = $3.54

Solution-4

R = D / P0

R = $5.15 / $92 = .0559 = 5.59%

Required return (R) = 5.59%

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