Question

Mobray Corp. is experiencing rapid growth. Dividends are expected to grow at 28 percent per year during the next three years, 18 percent over the following year, and then 5 percent per year indefinitely. The required return on this stock is 10 percent, and the stock currently sells for $98 per share. What is the projected dividend for the coming year?

Answer 1

Let X be the Div at Year 1.

Price of Stock = PV of CFs from it.

Year	CF	Calculation	Formula
1	X	Assumed	Given
2	1.28X	1.28*1	D1(1+g)
3	1.6384X	1.28*1.28	D2(1+g)
4	1.933312X	1.6384*1.18	D3(1+g)
5	2.0299776X	1.9333*1.05	D4(1+g)

P4 = D5 / [ Ke - g ]

P4 = Price after 4 Years

D5 = Div after 5 Years

Ke = Required Ret

g = Growth rate

P4 = D5 / [ Ke - g ]

= 2.03X / [ 10% - 5 % ]

= 2.03X / 5%

= 40.60X

Price Today:

Year	CF	PVF @10%	PV of CFs
1	X	0.9091	0.9091X
2	1.28X	0.8264	1.0579X
3	1.6384X	0.7513	1.2310X
4	42.532864X	0.6830	29.0505X
Price of Stock			32.2484X

Thus 32.2484X = $ 98

X = 98 / 32.2484

= $ 3.04

Project div for coming Year is $ 3.04