The Bell Weather Co.is a new firm in a rapidly growing industry.The company is planning on increasing its annual dividend by 20 percent next year and then decreasing the growth rate to a constant 5 percent per year.The company just paid its annual dividend in the amount of $1 per share.What is the current value of a share if the required rate of return is 14 percent?

Question

Quizplus · Accepted Answer

To calculate the current value of a share, we use the dividend discount model:
P0 = D1 / (r - g)
where P0 is the current stock price, D1 is the dividend expected to be paid at the end of the year, r is the required rate of return, and g is the growth rate.

Using the information provided:
D0 = $1 (just paid)
g1 = 20%
g2 = 5%
r = 14%

To calculate D1, we need to first calculate the dividend for the next year (D1):
D1 = D0 x (1 + g1) = $1 x (1 + 0.2) = $1.20

Next, we need to calculate the current value of the share:
P0 = D1 / (r - g) = $1.20 / (0.14 - 0.05) = $13.33

Therefore, the best choice is C, $13.33 as it is the correct current value of one share given the provided information.