Question

Burton Corp. is growing quickly. Dividends are expected to grow at a rate of 30 percent for the next three years, with the growth rate falling off to a constant 6.5 percent thereafter. The required return is 13 percent and the company just paid a dividend of $3.00.

  
What are the dividends each year for the next four years? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)

Year 1	$
Year 2	$
Year 3	$
Year 4	$

What is the share price in three years? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Share price in 3 years            $

What is the current share price? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Current share price            $

Answer 1

1. Dividend in year 1 = D0*(1+growth) = 30*(1+30%) = 39
Dividend in year 2 = D0*(1+growth)² = 30*(1+30%)² = 50.70
Dividend in year 3 = D0*(1+growth)³ = 30*(1+30%)³ = 53.9955 or 54.00
Dividend in year 4 = D0*(1+growth)³*(1+Growth 2)​​​​​​​ = 30*(1+30%)³*(1+6.5%) = 57.5052 or 57.51


2. Share price in 3 years = Dividend in year 3 + Terminal Value = 53.9955 + 57.5052/(13%-6.5%) =53.9955 + 884.70 = 938.69

3. Current Share Price = 39/1.13 + 50.70/1.13² + 53.9955/1.13³ + 57.5052/((13%-6.5%)*1.13³) = 724.78

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