The Hart Mountain Company has recently discovered a new type of kitty litter which is extremely absorbent.It is expected that the firm will experience (beginning now) an unusually high growth rate (20 percent) during the period (3 years) it has exclusive rights to the property where the raw material used to make this kitty litter is found.However, beginning with the fourth year the firm's competition will have access to the material, and from that time on the firm will achieve a normal growth rate of 8 percent annually.During the rapid growth period, the firm's dividend payout ratio will be relatively low (20 percent) in order to conserve funds for reinvestment.However, the decrease in growth in the fourth year will be accompanied by an increase in dividend payout to 50 percent.Last year's earnings were E0 = R2.00 per share, and the firm's required return is 10 percent.What should be the current price of the ordinary shares?

Question

Quizplus · Accepted Answer

The current price of the ordinary shares can be calculated using the dividend discount model, considering the high growth period and the subsequent normal growth period. The dividends for the first three years are calculated using the high growth rate and low payout ratio, and from the fourth year onwards, the normal growth rate and higher payout ratio are used. The present value of these dividends is then calculated using the required return rate to find the current share price.

The Hart Mountain Company Has Recently Discovered a New Type