Moody Farms just paid a dividend of $3.60 on its stock. The growth rate in dividends is expected to be a constant 7

Question

Moody Farms just paid a dividend of $3.60 on its stock. The growth rate in dividends is expected to be a constant 7 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?

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Solution PV of the dividends from year 7 and beyond Dividend in year 7 = 3.6*(1.07)^7 = 5.7808133153 PV6 = 5.7808133153/(0.11 - 0.07) = 144.5203328825 PV3 = 144.5203328825/(1.13)^3 = 100.1598401566 PV0 = 100.1598401566/(1.15)^3 = 65.8567207408 PV of the dividends from year 4 to year 6 PV3 = (3.6*1.07^4)/1.13 + (3.6*1.07^5)/1.13^2 + (3.6*1.07^5)/1.13^3 PV3 = 11.6295800751 PV0 = 11.6295800751/1.15^3 PV0 = 7.6466376757 PV of the dividends for the first three years PV0 = (3.6*1.07^1)/1.15 + (3.6*1.07^2)/1.15^2 + (3.6*1.07^3)/1.15^3 PV0 = 9.3658655708 Current share price = sum of all the PVs Current share price = 65.8567207408 + 7.6466376757 + 9.3658655708 = 82.8692239873 Current share price = $82.87

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Moody Farms just paid a dividend of $3

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