Question

Mobray Corp. is experiencing rapid growth. Dividends are expected to grow at 28 percent per year...

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?

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

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