Jen's Fashions is growing quickly. Dividends are expected to grow at a 22 percent rate for the next 3 years, with the growth rate falling off to a constant 8 percent thereafter. The required return is 12 percent and the company just paid a $3.80 annual dividend. What is the current share price?

Question

Quizplus · Accepted Answer

The current share price can be calculated using the dividend discount model with a two-stage growth. First, calculate the dividends for the first three years using the 22% growth rate: D1 = $3.80 * 1.22, D2 = D1 * 1.22, D3 = D2 * 1.22. Then, calculate the terminal value at the end of year 3 using the constant growth formula: D4 = D3 * 1.08, Terminal Value = D4 / (0.12 - 0.08). Discount these cash flows back to the present value using the required return of 12%. The sum of these present values gives the current share price, which is approximately $146.17.

Jen's Fashions Is Growing Quickly