McCullough Pet Supplies Inc is a young startup company No di

McCullough Pet Supplies, Inc., is a young start-up company. No dividends will be paid on the stock over the next nine years, because the firm needs to plow back its earnings to fuel growth. The company will then pay a dividend of $15 per share 10 years from today and will increase the dividend by 5 percent per year thereafter.

If the required return on this stock is 14 percent, what is the current share price? (Do not round intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).)

  Current share price

Stauber Corporation is expected to pay the following dividends over the next four years: $3, $10, $15, and $3.08. Afterwards, the company pledges to maintain a constant 5 percent growth rate in dividends, forever.

If the required return on the stock is 11 percent, what is the current share price? (Do not round intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).)

Current Share Price: $

Young Corp. 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 13 percent and the company just paid a $2.50 dividend, what is the current share price? (Hint: Calculate the first four dividends.) (Do not round intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).)

Solution

Question 1

Step 1: Computation of market price at the end of year 10 using Gordon Growth Mdel

P10 = D11/ (Ke-g)

= (15*1.05) / (.14-.05)

= 15.75 / .09

= $175

Step 2: Computing current share price by discounting the cashflow at required return

current share price = $51.30 (0+51.30)

Question 2

Step 1: Computation of market price at the end of year 4 using Gordon Growth Mdel

P4 = D5 / (Ke-g)

= (3.08*1.05) / (.11-.05)

= 3.234 / .06

= $53.90

Step 2: Computing current share price by discounting the cashflow at required return

current share price = $59.34 (2.70+8.12+10.97+37.55)

Question 3

Step 1: Computation of market price at the end of year 3 using Gordon Growth Mdel

P3 = D4/ (Ke-g)

= (2.5*1.25³*1.06) / (.13-.06)

= 5.1758 / .07

= $73.94

Step 2: Computing current share price by discounting the cashflow at required return

current share price = $60.45 (2.77+3.06+54.62)