ABC common stock is expected to have extraordinary growth in earnings and dividends of 20% per year for 2 years, after which the growth rate will settle into a constant 6%. If the discount rate is 15% and the most recent dividend was $2.50, what should be the approximate current share price? (Hint: this is Case 3, the non-constant growth

ABC current share price is $33.21.

Here, we are going to calculate the current share priceof ABC using the information in the question.

D1 = Recent dividend * (1 + 20%)

D1 = ($2.5*1.2)

D1 = $3

D2 = Recent dividend * (1 + 20%)

D2 = ($3*1.2)

D2 = $3.6

Value after year 2 = (D2 * Growth rate) / (Discount rate - Growth rate)

Value after year 2 = ($3.6*1.06) / (0.15 - 0.06)

Value after year 2 = $42.4

Current share price = Future dividends*Present value of discounting factor (15%,time period)

Current share price = $3/1.15 + $3.6/(1.15)^2 + $42.4/(1.15)^2

Current share price = $2.61 + $2.72 + $27.88

Current share price = $33.21

Therefore, ABC current share price is $33.21.

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$37.39

Explanation:

The computation of the approximate current share price is shown below:

But for this, first we compute the current value which is shown below:

= Next year dividend ÷ (Required rate of return - growth rate)

where,  

Current year dividend

For one year

= $2.5 + $2.5 × 20%

= $2.5 + 0.05

= $3

For next year

= $3 + $3 × 20%

= $3 + 0.6

= $3.60

For the third year

= $3.60 + $3.60 × 6%

= $3.60 + 0.216

= $3.816

Now the current value is

= ($3.816) ÷ (15% - 6%)

= $42.4

Now the current share price is

= $3 ÷ 1.15 + $3.6 ÷ 1.15^2 + $42.4 ÷ 1.15^2

= $2.61 + $2.72 + $32.06

= $37.39

1   all nations face the problem of scarcity because there are limited resources and unlimited wants. nations do not have enough factors of production to produce everything that their population wants. entrepreneurial resources initiate businesses to make new goods and services; labor resources produce goods and services.

2 there are four factors of production: natural resources, labor resources, capital resources, and entrepreneurial resources. natural resources are raw materials from nature that are used to produce goods. trees, water, and grains are natural resources. some natural resources, such as wheat and cattle, are renewable

3 wants

things that you do not need to have in order to survive, but would like to have

needs

things that you must have in order to survive

goods

physical products

services

tasks that a business perform for customers

resources

items that people can use to make or obtain what they need or want

determine

to settle or decide by choice of alternatives or possiblities

4 i really dont know

answer; capital structure decision;