Moody Farms just paid a dividend of $2.65 on its stock. The growth rate in dividends is expected to be a constant 3.8 percent per year indefinitely. Investors require a return of 15 percent for the first three years, a return of 13 percent for the next three years, and a return of 11 percent thereafter. What is the current share price? (Do not round intermediate calculations and round your answer to 2 decimal places, e. g., 32.16.)

$34.63.

Explanation:

The Gordon Dividend Discount Model will be used to calculate the current share price. This model helps us to determine how much should we pay for a stock and the analysis is based on dividends, growth rate, and our required rate of return. The model is as follows:

where

Po = Current market Price

D1 = Dividend Paid * (1 + g)

D2 = D1 (1 + g) ; D3 = D2 (1 + g) ; D4 = D3 (1 + g) ; D5 = D4 (1 + g)  

D6 = D5 (1 + g) ; D7 = D6 (1 + g)

This implies that:

⇒ Current Market Price = $34.63.

Note: Figures are rounded up-to 4 decimal points. A difference of up-to $2 would not affect your scores as far as the methodology is correct.

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