Phillips Co. is growing quickly. Dividends are expected to grow at a rate of 22
ID: 2813237 • Letter: P
Question
Phillips Co. is growing quickly. Dividends are expected to grow at a rate of 22 percent for the next three years, with the growth rate falling off to a constant 6 percent thereafter. If the required return is 12 percent and the company just paid a dividend of $3.25, what is the current share price? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
Phillips Co. is growing quickly. Dividends are expected to grow at a rate of 22 percent for the next three years, with the growth rate falling off to a constant 6 percent thereafter. If the required return is 12 percent and the company just paid a dividend of $3.25, what is the current share price? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
Explanation / Answer
D1=(3.25*1.22)=$3.965
D2=(3.965*1.22)=$4.8373
D3=(4.8373*1.22)=$5.901506
Value after year 3=(D3*Growth rate)/(Required return-Growth rate)
=(5.901506*1.06)/(0.12-0.06)=$104.2599393
Hence current share price=Future dividends*Present value of discounting factor(12%,time period)
=$3.965/1.12+$4.8373/1.12^2+$5.901506/1.12^3+$104.2599393/1.12^3
which is equal to
=$85.81(Approx).