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Bayou okra farms just paid a dividend of $3.95 on its stock. the growth rate in dividends is expected to be a constant 5 percent per year indefinitely. investors require a return of 14 percent for the first three years, a return of 12 percent for the next three years, and a return of 10 percent thereafter. what is the current share price?

Respuesta :

The current Dividend (D0) = $3.95

Growth in dividend = $3.95*(1+0.05) = $4.1475

D1 = $4.1475/(1+0.14) = $3.64

D2 = $4.1475*1.05/(1+0.14)^2 = $3.64

D3 = {$3.95*(1+0.05)^3}/(1+0.14)^3 = $3.35

D4 = {$3.95*(1+0.05)^4}/(1+0.12)^4 = $3.09

D5 = {$3.95*(1+0.05)^5}/(1+0.12)^5 = $3.05

D6 = {$3.95*(1+0.05)^6}/(1+0.12)^6 = $2.86

D7 = {$3.95*(1+0.05)^7} = $5.56

P6 = $5.56/(0.1 - 0.05) = $111.1609

Present value of P6 = $111.1609/(1.1)^6 = $62.7475

Current Price of the stock = $3.64+ $3.35 + $3.09 + $3.05 + $2.86 + $2.68 + $62.7475

Current Price of the stock = $81.42

The current share price of Bayou okra farms is $81.42.

How to calculate the share price?

The current dividend (D0) is given as $3.95. The growth in dividend will be:

= $3.95× (1+0.05)

= $4.1475

The dividend for the following periods will be:

  • D1 = $4.1475/(1+0.14) = $3.64
  • D2 = $4.1475 × 1.05/(1+0.14)² = $3.64
  • D3 = {$3.95 × (1+0.05)³}/(1+0.14)³ = $3.35
  • D4 = {$3.95 × (1 + 0.05)⁴}/(1+0.12)⁴ = $3.09
  • D5 = {$3.95 × (1+0.05)⁵}/(1+0.12)⁵ = $3.05
  • D6 = {$3.95 × (1+0.05)⁶}/(1+0.12)⁶ = $2.86
  • D7 = {$3.95 × (1+0.05)⁷} = $5.56

P6 = $5.56/(0.1 - 0.05) = $111.1609

Present value of P6 = $111.1609/1.1⁶ = $62.7475

Therefore, the current price of the stock will be:

= $3.64+ $3.35 + $3.09 + $3.05 + $2.86 + $2.68 + $62.7475

= $81.42

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