Question

Briley, Inc., is expected to pay equal dividends at the end of each of the next two years. Thereafter, the dividend will grow at a constant annual rate of 4.5 percent, forever. The current stock price is $50.

What is next year’s dividend payment if the required rate of return is 12 percent? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Answer 1

Let Dividend for next two years be $x.

Constant growth rate, g = 4.50%
Current Price, P0 = $50.00
Required Rate of Return, r = 12%

D1 = $x
D2 = $x
D3 = $x * 1.045

P2 = D3 / (r - g)
P2 = $x * 1.045 / (0.12 - 0.045)
P2 = $x * 13.933

$50 = $x / 1.12 + $x / 1.12^2 + $x * 13.933 / 1.12^2
$50 = $x * 0.89286 + $x * 0.79719 + $x * 13.933 * 0.79719
$50 = $x * 0.89286 + $x * 0.79719 + $x * 11.10725
$50 = $x * 12.79730
$x = $3.91

So, next year’s dividend payment will be $3.91