Question

Grandiose Growth has a dividend growth rate of 20%. The discount rate is 15%. The end-of-year dividend will be $3 per share. What is the present value of the dividend to be paid in year 1? Year 2? Year 3?

Answer 1

Answer:

The present value of dividend to be paid at the end of year 1, year 2, and year 3 are $2.60, $2.95, and $2.84 respectively.

Explanation:

The end of the year dividend is $3 per share.

The dividend growth rate is 20%.

The discount rate is 15%.

PV of dividend to be paid at the end of year 1

= $\frac{end\ of\ the\ year\ dividend}{(1+discount\ rate)^n}$

= $\frac{3}{(1 + .15)^1}$

= $\frac{3}{1.15}$

=$2.60

PV of dividend to be paid at the end of year 2

=$\frac{end\ of\ the\ year\ dividend}{(1 + discount\ rate)^n}$

=$\frac{3\times (1+.20)}{(1+.15)^2}$

=$\frac{3.60}{1.322}$

=$2.72

PV of dividend to be paid at the end of year 3

=$\frac{end\ of\ the\ year\ dividend}{(1 + discount\ rate)^n}$

=$\frac{3\times (1+.20)^2}{(1+.15)^3}$

=$\frac{4.32}{1.52}$

=$2.84