Great Pumpkin Farms just paid a dividend of $3.40 on its stock. The growth rate
ID: 2650596 • Letter: G
Question
Great Pumpkin Farms just paid a dividend of $3.40 on its stock. The growth rate in dividends is expected to be a constant 5 percent per year indefinitely. Investors require a return of 13 percent for the first three years, a return of 11 percent for the next three years, and a return of 9 percent thereafter. What is the current share price? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))
Great Pumpkin Farms just paid a dividend of $3.40 on its stock. The growth rate in dividends is expected to be a constant 5 percent per year indefinitely. Investors require a return of 13 percent for the first three years, a return of 11 percent for the next three years, and a return of 9 percent thereafter. What is the current share price? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))
Explanation / Answer
Answer:
Calculation of Current Share Price
Year 0
Year 1
Year 2
Year 3
Year 4
Year 5
Year 6
Year 7
Dividend
$ 3.5700
$ 3.7485
$ 3.9359
$ 4.1327
$ 4.3394
$ 4.5563
$ 4.7841
(3.40*105%)
(3.57*105%)
(3.7485*105%)
(3.9359*105%)
(4.1327*105%)
(4.3394*105%)
(4.5563*105%)
Price at the end of year 6
$ 53.1567
Dividend Year 7 / Required rate year 7
(4.7841/9%)
Net cash flows
$ 3.5700
$ 3.7485
$ 3.9359
$ 4.1327
$ 4.3394
$ 57.7130
$ 4.7841
Required rate of return
13%
13%
13%
11%
11%
11%
9%
PVF
0.88496
0.78315
0.69305
0.65873
0.59345
0.53464
1/(1+0.13)^1
1/(1+0.13)^2
1/(1+0.13)^3
1/(1+0.11)^4
1/(1+0.11)^5
1/(1+0.11)^6
Present value (PV) = Cash flows* PVF
$ 3.16
$ 2.94
$ 2.73
$ 2.72
$ 2.58
$ 30.86
Current Share Price = Sum of PVs
$ 44.98
Calculation of Current Share Price
Year 0
Year 1
Year 2
Year 3
Year 4
Year 5
Year 6
Year 7
Dividend
$ 3.5700
$ 3.7485
$ 3.9359
$ 4.1327
$ 4.3394
$ 4.5563
$ 4.7841
(3.40*105%)
(3.57*105%)
(3.7485*105%)
(3.9359*105%)
(4.1327*105%)
(4.3394*105%)
(4.5563*105%)
Price at the end of year 6
$ 53.1567
Dividend Year 7 / Required rate year 7
(4.7841/9%)
Net cash flows
$ 3.5700
$ 3.7485
$ 3.9359
$ 4.1327
$ 4.3394
$ 57.7130
$ 4.7841
Required rate of return
13%
13%
13%
11%
11%
11%
9%
PVF
0.88496
0.78315
0.69305
0.65873
0.59345
0.53464
1/(1+0.13)^1
1/(1+0.13)^2
1/(1+0.13)^3
1/(1+0.11)^4
1/(1+0.11)^5
1/(1+0.11)^6
Present value (PV) = Cash flows* PVF
$ 3.16
$ 2.94
$ 2.73
$ 2.72
$ 2.58
$ 30.86
Current Share Price = Sum of PVs
$ 44.98
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