<u>Complete Question:</u>
Tattletale News Corp. has been growing at a rate of 20% per year, and you expect this growth rate in earnings and dividends to continue for another 3 years.
a. If the last dividend paid was $10, what will the next dividend be? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
Dividend $
b. If the discount rate is 21% and the steady growth rate after 3 years is 2%, what should the stock price be today? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
Stock price $
Answer:
Requirement A. $12 per share
Requirement B. $44.14 per share
Explanation:
Requirement A.
The next dividend can be calculated using the following equation:
Next Dividend = D0 * (1 + g)
Here
D0 is the current dividend which is $10 and g is the Growth Rate which is 20% for the first three years
By putting values, we have:
Next Dividend = $10 * (1 + 20%)
= $12 per share
Requirement B.
Year Dividend Growth Rate New Dividend
1 10 20% 12
2 12 20% 14.40
3 14.4 20% 17.28
4 17.28 2% 17.63
Stock Price = $17.63 * (1 + 2%) / (21% - 2%) = $94.62
The above stock price calculated is the value of stock at the end of year 4. To discount it back to year zero, we will discount it by 21%.
Stock price at year0 = $94.62 / (1 + 21%)^4 = $44.14 per share
