Marcel Co. is growing quickly. Dividends are expected to grow at a 23 percent ra
ID: 2774830 • Letter: M
Question
Marcel Co. is growing quickly. Dividends are expected to grow at a 23 percent rate for the next 3 years, with the growth rate falling off to a constant 6 percent thereafter.
If the required return is 13 percent and the company just paid a $2.80 dividend. what is the current share price? (Do not round your intermediate calculations.)
a.) $58.37
b.) $64.66
c.) $61.05
d.) $65.95
e.) $63.37
Marcel Co. is growing quickly. Dividends are expected to grow at a 23 percent rate for the next 3 years, with the growth rate falling off to a constant 6 percent thereafter.
Explanation / Answer
Do = 2.80
D1 = 2.80 x (1+0.23) =3.444
D2 = 3.444x (1+0.23) =4.236
D3 = 4.236x(1+0.23)=5.21
Price at year 3 = D3x(1+g)/(Ke-g)
= 5.21x(1+0.06)/(0.13-0.06)
=5.226/0.07
=78.89
Current price is the PV of all the future dividends and prices.
Year
CF
PV factor 13%
PV
1
3.444
0.8850
3.05
2
4.236
0.7831
3.32
3
5.21+78.89
0.6931
58.29
64.66
The discounted value is 64.66. hence, the current price of the stock is 64.66.
Year
CF
PV factor 13%
PV
1
3.444
0.8850
3.05
2
4.236
0.7831
3.32
3
5.21+78.89
0.6931
58.29
64.66