Ks fashions is growing quickly Dividends are expected to inc

K\'s fashions is growing quickly. Dividends are expected to increase by 15 percent annually for the next three years, with the growth rate falling off to a constant 5 percent thereafter. the required return is 16 percent and the company just paid a $3.80 annual dividend. What is the current share price?

Solution

D1=(3.8*1.15)=$4.37

D2=(4.37*1.15)=$5.0255

D3=(5.0255*1.15)=$5.779325

Value after year 3=(D3*Growth rate)/(Required return-Growth rate)

=(5.779325*1.05)/(0.16-0.05)=$55.16628409

Hence current share price=Future dividends*Present value of discounting factor(16%,time period)

=$4.37/1.16+$5.0255/1.16^2+$5.779325/1.16^3+$55.16628409/1.16^3

which is equal to

=$46.55(Approx).