Question

Newkirk, Inc., is expected to pay equal dividends at the end of each of the next two years. Thereafter, the dividend will grow at a constant annual rate of 5.6 percent, forever. The current stock price is $61. What is next year’s dividend payment if the required rate of return is 14 percent? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Answer 1

Present value = Future value/(1+i)^n

i = interest rate per period

n= number of periods

value of stock = Present value of dividends + present value of Horizontal value

Horizontal value = dividend next year/(Required return - growth rate)

=>

let next year dividend be d

=>

horizontal value = d * 1.056/(14%-5.6%) = d* 12.5714285714

61 = d/1.14 + d/1.14^2 + d*12.5714285714/1.14^2

=>

61 = d * [ 1/1.14 + 1/1.14^2 + 12.5714285714/1.14^2]

=>

dividend = 5.39