Question

Present value of dividends: Fresno Corp. is a fast-growing company whose management expects it to grow at a rate of 30 percent over the next two years and then slow down to a growth rate of 18 percent for the following three years. If the last dividend paid by the company was $2.15, estimate the dividends for the next five years. Compute the present value of these dividends if the required rate of return is 14 percent.

Answer 1

Answer:

Explanation:

Dividends through year 1 to 5:

D1 = 2.15*(1+0.30)^1 = 2.80

D2 = 2.15*(1+0.30)^2 = 3.63

D3 = 2.15*(1+0.30)^2 * (1+0.18)^1 = 4.29

D4 = 2.15*(1+0.30)^2 * (1+0.18)^2 = 8.58

D5 = 2.15*(1+0.30)^2 * (1+0.18)^3 = 12.86

PV (D1) = 2.80

PV (D2) = 3.63 *PVIF = 3.63 * 0.87719 = 3.19

PV (D3) = 4.29 * 0.76947 = 3.30

PV (D4) = 8.58 * 0.67497 = 5.79

PV (D5) = 12.86 * 0.59208 = 7.62

Total of all PV's = 22.69