Question

Quinoa farms just paid a dividend of $2.95 on its stock. the growth rate in dividends is expected to be a constant 3.4 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

Answer 1

Based on the dividend growth rate and the required return on Quinoa Farms stock over the years, the current share price is $34.93.

What is Quinoa farm's current stock price?

This is the sum of the present values of the dividends using the various required returns.

The dividends for the years are:

Year 1:

= 2.95 x ( 1 + 0.034)

= $3.0503

Year 2:

= 3.0503 x ( 1 + 0.034)

= $3.1540

Year 3:

= 3.154 x 1.034

= $3.2612

Year 4:

= 3.2612 x 1.034

= $3.3721

Year 5:

= 3.3721 x 1.034

= $3.4868

Year 6:

= 3.4868 x 1.034

= $3.6053

Year 7:

= 3.6053 x 1.034

= $3.7279

This allows us to calculate the terminal value at year 6:

= 3.7279 / (11% - 3.4%)

= $49.05

The current price is:

= 3.0503 / 1.15 + 3.1540 / 1.15² + 3.2612 / 1.15³ + 3.3721 / (1.15³ x 1.13) + 3.4868 / (1.15³ x 1.13²) + 3.6053 / (1.15³ x 1.13³) + 49.05 / (1.15³ x 1.13³)

= $34.93

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