ABC common stock is expected to have extraordinary growth of 20% per year for two years, at which time the growth rate will settle into a constant 6%.If the discount rate is 15% and the most recent dividend was $2.50, what should be the current share price?

Question

Quizplus · Accepted Answer

The current share price is calculated using the dividend discount model with extraordinary growth. Calculate dividends for the first two years with 20% growth, then use the Gordon Growth Model for the constant growth phase starting in year 3. Discount all future dividends to present value using the 15% discount rate.

ABC Common Stock Is Expected to Have Extraordinary Growth of 20