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Calculate: Current Price Per Share

Question: Club Auto Parts' last dividend was $0.50 and the company expects to experience no growth for the next two years. However, Club will grow at an annual rate of 5% in the third and fourth years and beginning with the fifth year, it should attain a 10 percent growth which it will sustain thereafter. Club has a required rate of return of 12 percent. What should be the current price per share and the price per share at the end of the second year?

a. $18.19; $25.07
b. $30.30; $25.06
c. $25.06; $30.30
d. $25.06; $18.19
e. None of the above

Solution Preview

The price of the stock is calculated by taking the present value of the all future dividends paid by the company.

There are three growth periods, and we need to deal with them separately.
Year 1, 2 no ...

Solution Summary

This solution is comprised of a detailed, step-wise response which shows all of the required formulas and calculations needed to derive the current share price and price per share at the end of the second year. The solution is very easy to follow.