Bayou Okra Farms just paid a dividend of $3.85 on its stock. The growth rate in dividends is expected to be a constant 4 percent per year indefinitely. Investors require a return of 12 percent for the first three years, a return of 10 percent for the next three years, and a return of 8 percent thereafter. What is the current share price?

The answer is "$86.44".

Explanation:

The more recent dividends paid

Level of growth  

Required returns level for a first 3 years = 12

Required returns rate for year 3 to year 6 = 10

Required returns level after years 6= 8

Formula:

Divididend payment for year O to year 6 is calculated below:

Year                            

Rate of return needed             12        12          12          10            10      10    

Collection of dividend  Benefit of terminal                                                                                  126.6584  

Dividend purchase price  3.58       3.32          3.08      3.08      2.91        2.75     Terminal value at year-end 3                         95.16

Present dividend value         67.73    

Value of Stock                $86.44