Marcel Co. is growing quickly. Dividends are expected to grow at a 19 percent rate for...

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Marcel Co. is growing quickly. Dividends are expected to grow ata 19 percent rate for the next 3 years, with the growth ratefalling off to a constant 7 percent thereafter.

Required:
If the required return is 12 percent and the company just paid a$1.90 dividend. what is the current share price?
Options
$49.99
$56.32
$52.93
$55.21
$54.11

Answer & Explanation Solved by verified expert

4.1 Ratings (799 Votes)

	i	ii	iii	iv=i+iii	v	vi=iv*v
year	Dividend		Terminal value	Cash flow	PVIF @ 12%	present value
1	2.261	=1.9*119%		2.26	0.892857	2.02
2	2.691	=2.261*119%		2.69	0.797194	2.14
3	3.202	=2.691*119%	68.52	71.72	0.71178	51.05
				4.95		55.21

therefore price today =			55.21
ans =			55.21

Computation of terminal value =			=dividend in year 3/(required rate - growth rate)
			=3.202*107%/(12%-7%)
			68.52

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Transcribed Image Text

Marcel Co. is growing quickly. Dividends are expected to grow ata 19 percent rate for the next 3 years, with the growth ratefalling off to a constant 7 percent thereafter. Required:If the required return is 12 percent and the company just paid a$1.90 dividend. what is the current share price?Options$49.99$56.32$52.93$55.21$54.11