Question

Sheridan Corp. is a fast-growing company whose management expects it to grow at a rate of 26% percent over the next two years and then slow to a growth of 18% for the following three years. If the last dividend paid by the company was $2.15. What is the dividend for the 1st year, 2nd year, 3rd year,4th year, and 5th year? Then compute the present value of these dividends if the required rate of return is 14 percent.

Answer 1

Growth year wise:

1st year=26%

2nd year=26%

3rd year =18%

4th year=18%

5th year=18%

Last dividend paid by the company=$2.15

Dividend for 1st year=(1+0.26)*2.15=$2.709

Dividend for 2nd year=(1+0.26)*2.709=$3.41334

Dividend for 3rd year=(1+0.18)*3.41334=$4.027741

Dividend for 4th year=(1+0.18)*4.027741=$4.752735

Dividend for 5th year=(1+0.18)*4.752735=$5.608227

Present values of above calulated dividends:

NPV D1=2.709/(1.14)=$2.376316

NPV D2=3.41334/(1.14)^2=$2.626454

NPV D3=4.027741/(1.14)^3=$2.718611

NPV D4=4.752735/(1.14)^4=$2.814

NPV D5=5.608227/(1.14)^5=$2.912737