Respuesta :
The current price will be $242.78 if the growth rate 4%. It can be calculated by calculating the price in the first year to the seventh year and the terminal value at year 8.
Current prices generally can be defined as the indicated at a given moment in time, and said to be in nominal value. Present value or known as (PV) generally can be defined as the current value of a future sum of money or stream of cash flows given a specified rate of return.
Firstly, we calculate the price at Year 1 until Year 3
Y1 = Dividend Paid x (1 + growth rate)
Y1 = 3 x 1.04 = 3.12
Y2 = Dividend paid in Year 1 x (1+ growth rate)
Y2 = 3.12 x 1.04 = 3.2448
Y3 = Dividend paid in Year 3 x (1+ growth rate)
Y3 = 3.2448 x 1.04 = 3.375
Present value of the first dividend stream = [tex]3.12 /1.11 + 3.2448/(1.11^2) + 3.375/(1.11^3)[/tex]
Present value of the first dividend stream = $2.81 + $2.638 + $2.468
Present value of the first dividend stream = $7.916
The second dividend stream from Y4 to Y6 is :
Y4 = 3.375 x 1.04 = 3.51
Y5 = 3.51 x 1.04 = 3.6504
Y6 = 3.6504 x 1.04 = 3.796
Y7 = 3.796 x 1.04 = 3.947
Present value of the second dividend stream =[tex]3.4992/(1.1^4) + 3.6742/(1.1^5) + 3.8579/(1.1^6)[/tex]
Present value of the second dividend stream = $6.8491.
Then, calculate the terminal value at year 8:
$6.8491 /(7%-4%) = $6.8491/0.03 = 228.033
Current share price = 228.033 + 6.8491 + $7.916
Current share price = $242.78
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