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Burton Corp. is growing quickly. Dividends are expected to grow at a rate of 32 percent for the next three years, with the growth rate falling off to a constant 6.2 percent thereafter. If the required return is 14 percent and the company just paid a dividend of $2.85, what is the current share price?

Respuesta :

Shahzaibfaraz

Answer:

P0 = $71.7850 rounded off to $71.79

Explanation:

The two stage growth model of DDM will be used to calculate the price of the stock today. The DDM values a stock based on the present value of the expected future dividends from the stock. The formula for price today under this model is,

P0 = D0 * (1+g1) / (1+r)  +  D0 * (1+g1)^2 / (1+r)^2  +  ...  +  D0 * (1+g1)^n / (1+r)^n  +  

[(D0 * (1+g1)^n  *  (1+g2) /  (r - g2))  /  (1+r)^n]

Where,

  • g1 is the initial growth rate
  • g2 is the constant growth rate
  • D0 is the dividend paid today or most recently
  • r is the required rate of return

P0 = 2.85 * (1+0.32) / (1+0.14)  +  2.85 * (1+0.32)^2 / (1+0.14)^2  +  

2.85 * (1+0.32)^3 / (1+0.14)^3  +  

[(2.85 * (1+0.32)^3  *  (1+0.062)  / (0.14 - 0.062))  /  (1+0.14)^3]

P0 = $71.7850 rounded off to $71.79

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