Next year, Starbucks is expected to pay a dividend of $2.34. The year after, Starbucks is expected to pay a dividend of $4.88. Then, experts expect the dividends to grow at a constant rate of 4.3% per year. The required return for Starbucks is 9.8%. What should be the price of a Starbucks share?

The price of a Starbucks share should be $37.92. To calculate the price of a Starbucks share, we can use the dividend discount model (DDM). The DDM states that the value of a stock is equal to the present value of all its future dividends.

First, let's find the present value of the dividends in the second and third years. The present value is calculated by dividing the dividend by the required return minus the dividend growth rate.

For the second year, the dividend is $4.88, the required return is 9.8%, and the growth rate is 4.3%. Using the formula, the present value is $4.88 / (0.098 - 0.043) = $101.25.

For the third year and beyond, the dividends are expected to grow at a constant rate of 4.3%. We can use the formula for the present value of a growing perpetuity: dividend / (required return - growth rate). Plugging in the numbers, we get $4.88 / (0.098 - 0.043) = $120.48.

Now, we need to find the present value of the first-year dividend. It is $2.34, and the growth rate is 4.3%. Using the formula, the present value is $2.34 / (0.098 - 0.043) = $48.75.

Finally, we can find the price of a Starbucks share by adding up the present values of all the dividends: $101.25 + $120.48 + $48.75 = $270.48.

However, we need to subtract the present value of the second-year dividend because it is already included in the third year and beyond dividends. So the price of a Starbucks share is $270.48 - $101.25 = $169.23.

Considering the growth rate, the price of a Starbucks share should be $169.23 + $101.25 = $270.48. Rounded to two decimal places, the price of a Starbucks share should be $37.92.

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