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Drupady [299]
3 years ago
10

3. The Johnson Company will pay an annual dividend of $2.05 next year. The company has increased its dividend by 3.5% a year for

the past twenty years and expects to continue doing so. What will a share of this stock be worth 4 years from now if the required return is 14%
Business
1 answer:
vlada-n [284]3 years ago
4 0

Answer:

A share of this stock be worth$ 21.88 four years from now

Explanation:

Amount of annual dividend that will be paid the next year = $ 2.05

increase in dividend by 3.5% = \frac{100+3.5}{100} = increase by a factor of 1.035

Since there is a 14% return, overall increase in dividend = \frac{1.035}{0.14 - 0.035} = 9.857

<em>Note:</em>

<em>0.035 was obtained from </em>\frac{3.5}{100}<em>= 0.035 (dividend increase)</em>

<em>0.14 was obtained from </em>\frac{1.4}{100}<em> = 0.14 (percentage return required)</em>

over the next 20 years his new value of dividend will be

New value of dividend = $2.05 + 9.857 = 11.907

Converting to a percentage,

\frac{100+11.907}{100}= 1.1907

Net dividend increase =

Dividend returns minus increase in dividend for 20 years is given as

14% - 3.5% = 10.5%

From the above, the

Worth of a share of his stock 4 years from now can be computed by

(dividend X Percentage increase in 20 years)/ net percent dividend increase  + (increase in 4 years/ net dividend increase) X 100

\frac{(2.05 (1.1907))  }{10.5} + \frac{(2.2729)}{10.5} × 100  =$21.88

∴ A share of this stock be worth$ 21.88 four years from now

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