Question

experiencing rapid growth. Dividends are expected to grow at 25 percent per year during the next three years, 18 percent over the following year, and then 8 percent per year, indefinitely. The required return on this stock is 15 percent, and the stock currently sells for $60.00 per share. What is the projected dividend for the coming year

Answer 1

Answer:

D = 2.15

Explanation:

let D be next year dividend

D2 = D * 1.3 = 1.3D

D3 = D * 1.3^2 = 1.69D

D4 = D * 1.3^2 * 1.2 = 2.028D

price at year 4 = D * 1.3^2 * 1.2 * 1.05/(0.11-0.05) = 35.49D

current price = 60

=>

D/1.11 + 1.3D/1.11^2 + 1.69D/1.11^3 + 2.028D/1.11^4 + 35.49/1.11^4 = 60

Answer 2

Answer:

The coming year dividend is 2.9762

Explanation:

Let us suppose the dividend of the current year is x so

$Value=\sum \dfrac{Div (1+r\%)^n}{1+rr\%}$

Here div is the dividend which is to be found as x

r is the growth rate given as 25% for first 3 years, 18% for fourth year and 8% onwards

rr is the stock rate of return which is given as 15%

Current value is given as 60

So

$60= \dfrac{x (1.25)^1}{(1.15)^1}+ \dfrac{x (1.25)^2}{(1.15)^2}+\dfrac{x (1.25)^3}{(1.15)^3}+\dfrac{x (1.25)^3(1.18)^1}{(1.15)^4}+\dfrac{x (1.25)^3(1.18)^1(1.08)^1}{(0.15-0.08)(1.15)^4}\\\dfrac{1.25x}{1.15}+\dfrac{1.5625x}{1.3225}+\dfrac{1.953125x}{1.520875}+\dfrac{2.3046875x}{1.74900625}+\dfrac{2.4890625x}{0.1224304375}=60\\x=2.381$

So the current year dividend is 2.381, the next year dividend is given as

Next year =Current Year * (1+r%)

Next year =2.381 * (1.25)

Next year=2.9762

So the coming year dividend is 2.9762