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Anicex Co. is growing quickly. Dividends are expected to grow at a rate of 20 percent...

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Finance

Anicex Co. is growing quickly. Dividends are expected to grow ata rate of 20 percent for the next three years, with the growth ratefalling off to a constant 5 percent thereafter. If the requiredreturn is 14 percent and the company just paid a dividend of $2.50,what is the current share price?

Options available:

a.$66.21

b.

$51.87

c.

$42.34

d.

$86.52

Answer & Explanation Solved by verified expert
4.4 Ratings (957 Votes)

c. $42.34

As per dividend discount model, current share price is the present value of dividends.
Step-1:Calculation of present value of dividend of next 3 years
Year Dividend Discount factor Present value
a b c=1.14^-a d=b*c
1 $       3.00 0.877193 $       2.63
2 $       3.60 0.769468 $       2.77
3 $       4.32 0.674972 $       2.92
Total $       8.32
Working:
Dividend of Year :
1 $       2.50 x           1.20 = $       3.00
2 $       3.00 x           1.20 = $       3.60
3 $       3.60 x           1.20 = $       4.32
Step-2:Calculation of present value of dividends of after year 3
Present value = D3*(1+g)/(K-g)*DF3 Where,
= $    34.02 D3 $       4.32
g 5%
K 14%
DF3 0.674972
Step-3:Calculation of present value of future dividends
Present value of future dividends = $       8.32 + $    34.02
= $    42.34

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