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What is the expected dividend to be paid in the first 3 years if yesterday's dividend...

What is the expected dividend to be paid in the first 3 years if yesterday's dividend was $6.00 (D0), dividends are expected to grow at 20% in year 1, 10% in year 2 and after that its growth is at a constant growth rate 6%? What will be the current market price? Assume the firm has a 12% expected return?

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Answer #1

Solution:- Given in Question-

Expected Return (Ke) = 12%

DPS0 = $6

DPS1 = DPS0 (1+Growth Rate)

DPS1 = $6 (1 + 0.20)

DPS1 = $7.20

DPS2 = DPS1 (1+Growth Rate)

DPS2 = $7.20 (1 + 0.10)

DPS2 = $7.92

DPS3 = DPS2 (1+Growth Rate)

DPS3 = $7.92 (1 + 0.06)

DPS3 = $8.395

DPS4 = DPS3 (1+Growth Rate)

DPS4 = $8.395 (1 + 0.06)

DPS4 = $8.8987

Terminal Value at the end of Third Year =

Terminal Value at the end of Third Year =

Terminal Value at the end of Third Year = $148.317

To find Current Market Price-

The Current Market price = $124.29

If you have any query related to question then feel free to ask me in a comment. Thanks. Please rate.

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