Question

Mastercard Inc.’s stock has a required return of 13% and the stock is currently priced at $50 per share. Mastercard just paid a dividend of $1.00, and they have announced that they plan to increase its dividend payment at a rate of 30% per year for the next 4 years. After Year 4, they expect the dividend growth rate to slow down from the 30% to a more modest constant growth rate of X% per year going forward forever. What is the constant growth rate that Mastercard is expecting after Year 4 (i.e., what is X)?

You must show all calculation steps, providing a final answer only will not get you full marks.

Answer 1

Required rate of Return(Ke) = 13%

Current Price(P0) = $50 per share

Dividend just paid(D0) = $1

Growth rate of Dividend for next 4 years(g) = 30%

Constant Growth rate thereafter(g1)= X

Calculting the X:-

50 = 1.1504 + 1.3235 + 1.5226 + 1.7517 + 1.7517*(1+X)/(0.13-X)

44.2518 = 1.7517*(1+X)/(0.13-X)

44.2518(0.13-X) = 1.7517 + 1.7517X

5.752734 - 44.2518X = 1.7517 + 1.7517X

4.001034 = 46.0035X

X = 8.6972%

So, X is 8.6972%