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Janicex Co. is growing quickly. Dividends are expected to grow at a rate of 20 percent for the...

Question:

Janicex Co. is growing quickly. Dividends are expected to grow at a rate of 20 percent for the next three years, with the growth rate falling off to a constant 5 percent thereafter. If the required return is 14 percent and the company just paid a dividend of $2.50, what is the current share price ?

Stock splits:

As the name implies, Stock splits is basically dividing the current shares into more number of shares. There will be more number of shares outstanding but the price of each share will also decrease so as the total wealth of the shareholders do not change.

Answer and Explanation:

Current Dividend (D0) = 2.5
Now for next 3 years dividends are expected to grow at a rate of 20 percent

  • D1 = D0 (1 + G)
    D1 = 2.5 (1 + 0.2 )
    = 3
  • D2...

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Learn more about this topic:

The Dividend Growth Model

from Finance 101: Principles of Finance

Chapter 14 / Lesson 3
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