Yang Corp. is growing quickly. Dividends are expected to grow at a rate of 28 pe

Question

Yang Corp. is growing quickly. Dividends are expected to grow at a rate of 28 percent for the next three years, with the growth rate falling off to a constant 7.9 percent thereafter.

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 round intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).)

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 round intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).)

Explanation / Answer

To calculate the current share price, we will have to calculate the present value of dividends for the next 3 years and price at the end of year 3 (which will require calculation of D4). The formula for calculating current share price can be derived as follows:

Current Share Price (Present Value) = D1/(1+Required Return)^1 + D2/(1+Required Return)^2 + D3/(1+Required Return)^3 + D4/(Required Return - Growth Rate after 3 years)*(1+Required Return)^3

________________

Here,

D1 = 3.70*(1+28%)

D2 = 3.70*(1+28%)^2

D3 = 3.70*(1+28%)3

D4 = 3.70*(1+28%)^3(1+7.9%)

P3 = 3.70*(1+28%)^3*(1+7.9%)/(16% - 7.9%)

_____________________

Using these values in the above formula, we get,

Current Share Price =3.70*(1+28%)/(1+16%)^1+3.70*(1+28%)^2/(1+16%)^2+3.70*(1+28%)^3/(1+16%)^3+3.70*(1+28%)^3*(1+7.9%)/(16% - 7.9%)*(1+16%)^3 = $79.78 (answer)

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