Garcia Inc.has a current dividend of R3.00 per share (D0 = R3.00).Analysts expect that the dividend will grow at a rate of 25 percent a year for the next three years, and thereafter it will grow at a constant rate of 10 percent a year.The company's cost of equity capital is estimated to be 15 percent.What is the current share price of Garcia Inc.?

Question

Quizplus · Accepted Answer

The current share price is calculated using the dividend discount model with varying growth rates. Calculate the dividends for the first three years with 25% growth, then calculate the terminal value at the end of year 3 using the constant growth rate of 10%. Discount all these cash flows back to the present value using the cost of equity of 15%. The calculations yield a current share price of approximately R95.42.