ABC common stock is expected to have extraordinary growth of 20 percent per year for two years, at which time the growth rate will settle into a constant 6 percent.If the discount rate is 15 percent and the most recent dividend was $2.50, what should be the current share price? A)$31.16 B)$33.23 C)$37.42 D)$47.77 P_o =

Question

Quizplus · Accepted Answer

The current share price can be calculated using the dividend discount model as follows:
D0 = $2.50
g1 = 20%
g2 = 20%
g3 = 6%
r = 15%
n1 = 2 years
n2 = infinity
PV = D1/(1+r)^1 + D2/(1+r)^2 + D2*(1+g2)/(r-g2)/(1+r)^2
= $2.50*(1+20%)/(1+15%)^1 + $2.50*(1+20%)^2/(1+15%)^2 + $2.50*(1+6%)/(15%-6%)/(1+15%)^2
= $3.44 + $3.98 + $30.00
= $37.42
Therefore, the current share price should be $37.42.

ABC Common Stock Is Expected to Have Extraordinary Growth of 20