Supernormal Growth Rizzi Co. is growing quickly. Dividends are expected to grow at a 25 percent rate for the next three years, with the growth rate falling off to a constant 7 percent thereafter. If the required return is 13 percent and the company just paid a $3.10 dividend, what is the current share price?

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andromache andromache · Answer 1 · 2021-06-22T03:04:40+02:00

Answer:

$86.13

Explanation:

The computation of the current share price is shown below:

Given that

Dividend just Paid (D0) is $3.10

and Required Return (R ) 13%

Now

Dividend Paid in 1st year = $3.10 (1.25) = $3.875

Dividend Paid in 2ndyear = $3.875 (1.25) = $4.844

Dividend Paid in3rd year = $4.844 (1.25) = $6.055

Dividend Paid in 4th year = $6.055 (1.07) = $6.47

Now

Stock Price in 3rd year (P3) = D4 ÷ (R - g)

= $6.47 ÷ (0.13- 0.07)

= $107.83

Now the Current Share Price(P0) is

Current Share Price (P0) = $3.875 ÷ (1.13) + $4.844 ÷ (1.13)^2 + $6.055 ÷ (1.13)^3 + $107.83 ÷ (1.13)^3

= $3.42 +$3.79 + $4.19 + $74.73

= $86.13