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

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