Question

Oxygen Optimization stock is currently priced at 87.28 dollars per share. The stock is expected to pay annual dividends that are expected to grow by 2.72 percent per year forever starting after the next dividend is paid in 1 year. The expected return on the stock is 11.31 percent per year. What is the dividend expected to be in 9 years?

Answer 1

Price of the share is given by the Gordon constant growth model, which is given by

Price of share = D(0) *( 1 + G) / ( R - G)

where D(0) = Current dividend

G= Growth rate = 2.72%

R = Required rate of return on the stock = 11.31%

We need to calculate the Dividend just paid with the above formula,

87.28 = D(0) ( 1 + .0272) / (0.1131 - 0.0272 )

D(0) = 87.28 * 0.0859 / 1.0272

= $7.30

Dividend for year 1 = 7.30 * 1.0272 = 7.50 and so on.

Year	Dividends
0	7.30
1	7.50
2	7.70
3	7.91
4	8.13
5	8.35
6	8.58
7	8.81
8	9.05
9	9.29