Jean's Fashions is growing quickly. Dividends are expected to grow at a 22 percent rate for the next 3 years, with the growth rate falling off to a constant 8 percent thereafter. The required return is 12 percent and the company just paid a $3.80 annual dividend. What is the current share price?

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17 December, 23:28

Jean's Fashions is growing quickly. Dividends are expected to grow at a 22 percent rate for the next 3 years, with the growth rate falling off to a constant 8 percent thereafter. The required return is 12 percent and the company just paid a $3.80 annual dividend. What is the current share price?

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Ibrahim Quinn · Answer 1

Share price = $146.168

Explanation:

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

The required rate of return here is 12%

The dividend growth model a be applied to each of the years as appropriate.

The share price of Jean Fashion can be computed as follows:

Year working Present value of Dividend

1 3.80 * (1.22) * (1.12) ^ (-1) = 4.139

2 3.80 * ((1.22) ^2 * (1.12) ^ (-2) = 4.50

3 3.80 * (1.22) ^3 * (1.12^ (-3) = 4.91

4 to infinity See workings 132.60

Price of share (total PV) $146.168

Share price = $146.168

Workings

PV in year 3 = 3.80 * (1.22) ^3 * (1.08) / (0.12-0.08) = 186.30

PV in year 0 = 186.30 * 1.12^ (-3) = 132.608