The Bell Weather Co.is a new ﬁrm in a rapidly growing industry.The company is planning on increasing its annual dividend by 20% a year for the next four years and then decreasing the growth rate to 5% per year.The company just paid its annual dividend in the amount of €1.00 per share. What is the current value of one share if the required rate of return is 9.25%?

Question

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The current value of the share is calculated using the dividend discount model with varying growth rates. First, calculate the dividends for the next four years with a 20% growth rate, then calculate the terminal value using the 5% growth rate from year five onwards. Discount these cash flows back to the present value using the required rate of return of 9.25%. The correct value is approximately €41.05.