Phillips Co is growing quickly Dividends are expected to gro

Phillips Co. is growing quickly. Dividends are expected to grow at a rate of 25 percent for the next three years, with the growth rate falling off to a constant 6 percent thereafter. If the required return is 11 percent and the company just paid a dividend of $1.15, what is the current share price? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) Current share price

Solution

D0 = 1.15

D1 = 1.15*1.25 = 1.4375

D2 = 1.4375*1.25 = 1.796875

D3 = 1.896875 *1.25 = 2.24609375

D4 = 2.2461*1.06 = 2.38086

Price in year 3 (P3) = D4/(r-g) as the dividend distribution model where D4 =  2.38086, r = 11% =0.11 and g = 6% = 0.06

P3 = 2.38086/(0.11-0.06) = 47.6171875

Current Price = 1.4375/1.11+1.796875/1.11^2+2.24609375/1.11^3+47.6171875/1.11^3 = $39.21

Current Share price = $39.21