Fuji Co. is growing quickly. Dividends are expected to grow at a rate of 24 percent for the next three years, with the growth rate falling o

Fuji Co. is growing quickly. Dividends are expected to grow at a rate of 24 percent for the next three years, with the growth rate falling off to a constant 5 percent thereafter. If the required return is 12 percent and the company just paid a dividend of $3.85, what is the current share price?

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  1. Answer:

    P0 = $92.57889 rounded off to $92.58

    Explanation:

    Using the two stage dividend discount model, we calculate the price of the stock today. It values the stock based on the present value of the expected future dividends from the stock. To calculate the price of the stock today, we will use the following formula,

    P0 = D0 * (1+g1) / (1+r)  +  D0 * (1+g1)^2 / (1+r)^2  +  …  +  D0 * (1+g1)^n / (1+r)^n  + [(D0 * (1+g1)^n * (1+g2)  /  (r – g2))  /  (1+r)^n]

    Where,

    • D0 is the dividend just paid
    • r is the required rate of return
    • g1 is the initial growth rate
    • g2 is the constant growth rate in dividends

    P0 = 3.85 * (1+0.24) / (1+0.12)  +  3.85 * (1+0.24)^2 / (1+0.12)^2  +

    3.85 * (1+0.24)^3 / (1+0.12)^3  +  

    [(3.85 * (1+0.24)^3 * (1+0.05) / (12 – 0.05)) / (1+0.12)^3]

    P0 = $92.57889 rounded off to $92.58

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