Yang Corp. is growing quickly. Dividends are expected to grow at a rate of 29 pe
ID: 2651568 • 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).)
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.
Explanation / Answer
Answer:
Calculation of Current share price :
Year 0
Year 1
Year 2
Year 3
Year 4
Dividend
$ 3.150
$ 4.064
$ 5.242
$ 6.762
$ 7.222
(3.15*129%)
(4.064*129%)
(5.242*129%)
(6.762*106.8%)
Share price at the end of year 3
$ 88.07
= Dividend at the end of year 4 / (required rate - growth rate)
= 7.222 /(0.15 -0.068)
Total cash inflows (CF)
$ 4.06
$ 5.24
$ 94.84
PVF (15%)
1
0.86957
0.75614
0.65752
Present value (CF*PVF)
$ 3.53
$ 3.96
$ 62.36
Current Price of the share (Sum of PVs)
$ 69.85
Calculation of Current share price :
Year 0
Year 1
Year 2
Year 3
Year 4
Dividend
$ 3.150
$ 4.064
$ 5.242
$ 6.762
$ 7.222
(3.15*129%)
(4.064*129%)
(5.242*129%)
(6.762*106.8%)
Share price at the end of year 3
$ 88.07
= Dividend at the end of year 4 / (required rate - growth rate)
= 7.222 /(0.15 -0.068)
Total cash inflows (CF)
$ 4.06
$ 5.24
$ 94.84
PVF (15%)
1
0.86957
0.75614
0.65752
Present value (CF*PVF)
$ 3.53
$ 3.96
$ 62.36
Current Price of the share (Sum of PVs)
$ 69.85
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