Fuji Co. is growing quickly. Dividends are expected to grow at a rate of 26 percent for the next three years, with the growth rate falling off to a constant 8 percent thereafter. If the required return is 15 percent and the company just paid a dividend of $3.55, what is the current share price

Current price of stock=$84.86

Explanation:

The value of a stock, using the dividend valuation model, is the Present value (PV) of its future cash flows discounted at the required rate of return.

The price of the share would be determined as follows:

Year                                          PV of Dividend

1      3.55 × 1.26^1 × 1.15^-1     = 3.89

2       3.55 × 1.26^2 × 1.15^-2  =  4.26

3       3.55 × 1.26^3 × 1.15^-3   = 4.67

Year 4 and beyond

This will be done in two steps

Step 1- PV of dividend in year 3 terms

PV = D×(1+g)/r-g

D- dividend in year 3- , g- growth rate -8%, r- rate of return

PV = (3.55 × 1.26^3 × 1.08)/(0.15-0.08)=109.563

Step 2: PV of dividend in year 0 terms

PV = D× (1+r)^-n

D = PV of dividend in year 3, r-rate of return , n- number of years

PV = 109.563  ×  1.15^(-3)= 72.039

Current price of stock = 3.89  + 4.26  + 4.67  + 72.039 = 84.86

Current price of stock=$84.86

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