Question

VIP Corporation has just paid a dividend of $1.50. Dividends are expected to grow at 20% for the first three

years, 10% for the following two years. What is the expected growth rate for the subsequent years if the stock is selling for $24.86 today and the required return is 17 percent?

A. –1.07%

B. –1.75%

C. 8.00%

D. 8.65%

Answer 1

Option C

24.86=1.50*(1.20/1.17)+1.50*(1.20/1.17)^2+1.50*(1.20/1.17)^3+1.50*(1.20/1.17)^3*(1.10/1.17)+1.50*(1.20/1.17)^3*(1.10/1.17)^2+1.50*(1.20/1.17)^3*(1.10/1.17)^2*(1+g)/(17%-g)

=>1.50*(1.20/1.17)^3*(1.10/1.17)^2*(1+g)/(17%-g)=24.86-(1.50*(1.20/1.17)+1.50*(1.20/1.17)^2+1.50*(1.20/1.17)^3+1.50*(1.20/1.17)^3*(1.10/1.17)+1.50*(1.20/1.17)^3*(1.10/1.17)^2)

=>(1+g)/(17%-g)=(24.86-(1.50*(1.20/1.17)+1.50*(1.20/1.17)^2+1.50*(1.20/1.17)^3+1.50*(1.20/1.17)^3*(1.10/1.17)+1.50*(1.20/1.17)^3*(1.10/1.17)^2))/(1.50*(1.20/1.17)^3*(1.10/1.17)^2)

=>(1+g)/(17%-g)=12.00494985

=>g=8.00%