Biarritz Corp. is growing quickly. Dividends are expected to grow at a rate of 28 percent for the next three years, with the growth rate falling off to a constant 6.4 percent thereafter. If the required return is 16 percent and the company just paid a dividend of $2.95, what is the current share price

Price of share = $112.496

Explanation:

According to the dividend valuation model, the current price of a stock is the present value of the expected future dividends discounted at the required rate of return.

So we will discount the steams of dividend using the required rate of 16.0% as follows

Year Present Value

1 2.95 * 1.28 * 1.16^ (-1) = 3.178

2 2.95 * 1.28^2 * 1.16^ (-2) = 3.591

3 2.95 * 1.28^3 * 1.16^ (-3) = 3.963

Year 4 and beyond

Present Value in year 3 = (2.95 * 1.28^3 * 1.064) / (0.28-0.064) = 68.568

Present value in year 0 = 68.56813227 * 1.16^ (-3) = 43.92

Price of share = 3.1788 + 3.591 + 3.963 + 43.928

= 112.496

Price of share = $112.496