Question

g ABC common stock is expected to have extraordinary growth in earnings and dividends of 21% per year for 2 years, after which the growth rate will settle into a constant 4%. If the discount rate is 14% and the most recent dividend was $4, what should be the approximate current share price (in $ dollars)

Answer 1

Answer: $49.87

Explanation:

Based on the information given,

D1 = $4 × (100% + 21%) = $4 × 1.21 = $4.84

D2 = $4.84 × 1.21 = $5.8564

Value after year 2 will be:

= (D2 × Growth rate) / (Discount rate -Growth rate)

= ($5.8564 × 1.04) / (0.14 - 0.04)

= $6.09/0.1

= $60.9

Then, the current share price will be:

= 4.84/1.14 + 5.8564/1.14² + 60.9/1.14³

= 4.25 + 4.51 + 41.11

= $49.87