Answer:
1.What is the dividend for the 1st year?
$2.67
2.What is the dividend for the 2nd year?
$3.31
3.What is the dividend for the 3rd year?
$3.90
4.What is the dividend for the 4th year?
$4.60
5.What is the dividend for the 5th year?
$5.43
6.Compute the present value of these dividends if the required rate of return is 14 percent.
1. $2.34
2. $2.54
3. $2.63
4. $2.73
5. $2.82
Explanation:
Last Dividend paid = $2.15
Growth rate:
First two years = 24%
Following three years = 18%
FV of Dividend = PV ( 1 + g )^n
1.
Dividend for the 1st year = $2.15 x ( 1 + 24% )^1 = $2.15 x ( 1 + 0.24 )^1 = $2.15 x ( 1.24 )^1 = $2.67
2.
Dividend for the 2nd year = $2.15 x ( 1 + 24% )^2 = $2.15 x ( 1 + 0.24 )^2 = $2.15 x ( 1.24 )^2 = $3.31
3.
Dividend for the 3rd year = $3.31 x ( 1 + 18% )^1 = $3.31 x ( 1 + 0.18 )^1 = $3.31 x ( 1.18 )^1 = $3.90
4.
Dividend for the 4th year = $3.31 x ( 1 + 18% )^2 = $3.31 x ( 1 + 0.18 )^2 = $3.31 x ( 1.18 )^2 = $4.60
5.
Dividend for the 5th year = $3.31 x ( 1 + 18% )^3 = $3.31 x ( 1 + 0.18 )^3 = $3.31 x ( 1.18 )^3 = $5.43
6.The present value of these dividends
Present value of dividends can be calculated by following formula:
PV = FV / ( 1 + r )^n
FV = Dividend for the year
r = rate of return = 14%
n = number of years
1. PV = $2.98 / ( 1 + 0.14 )^1 = $2.98 / ( 1.14 )^1 = $2.98 / 1.14 = $2.34
2. PV = $3.31 / ( 1 + 0.14 )^2 = $3.31 / ( 1.14 )^2 = $3.31 / 1.2996 = $2.54
3. PV = $3.90 / ( 1 + 0.14 )^3 = $3.90 / ( 1.14 )^3 = $3.90 / 1.481544 = $2.63
4. PV = $4.60 / ( 1 + 0.14 )^4 = $4.60 / ( 1.14 )^4 = $4.60 / 1.68896 = $2.73
5. PV = $5.43 / ( 1 + 0.14 )^5 = $5.43 / ( 1.14 )^5 = $5.43 / 1.925416 = $2.82
