Problem 7-18 Supernormal Growth [LO 1] Yang Corp. is growing quickly. Dividends
ID: 2704665 • Letter: P
Question
Problem 7-18 Supernormal Growth [LO 1]
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 6.9 percent thereafter.
If the required return is 16 percent and the company just paid a $3.20 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 28 percent for the next three years, with the growth rate falling off to a constant 6.9 percent thereafter.
Explanation / Answer
D0= 3.2
D1 = 3.2*1.28
D2 = 3.2*1.28^2
D3 = 3.2*1.28^3
D4 = 3.2*1.28^3*1.069
current share price = 3.2*1.28/1.16 + 3.2*1.28^2/1.16^2 + 3.2*1.28^3/1.16^3 + (3.2*1.28^3*1.069/(16%-6.9%))/1.16^3
= $62.23