Question

Rylan Industries has is expected to pay a constant dividend for the next four years. Rylan's current share price is $30 per share and is expected to be (ex-dividend) $40 per share in year 4. Given that Rylan's equity cost of capital is 14%, what is the expected constant annual dividend in years 1-4?

a. $3,45 per share b. $4,98 per share c. $2,92 per share d. $4,30 per share

Answer 1

Given about Rylan Industries,

It will pay constant dividend for 4 years.

Current price P0 = $30

Price at year 4 P4 = $40

equity cost of capital Ke = 14%

Let expected constant annual dividend in years 1 - 4 be D

So, P0 = D/(1+Ke) + D/(1+Ke)^2 + D/(1+Ke)^3 + D/(1+Ke)^4 + P4/(1+Ke)^4

=> 30 = D(1/1.14 + 1/1.14^2 + 1/1.14^3 + 1/1.14^4) + 40/1.14^4

=> 30 = 23.68 = D*2.91

=> D = 2.17

So, annual dividend for next 4 years = $2.17

Calculation and concept shown are correct. There must be some misprinting in the values. With the given values D = $2.17 per year