Question

-Weston Corporation just paid a dividend of $3.25 a share (i.e., D0 = $3.25). The dividend is expected to grow 12% a year for the next 3 years and then at 5% a year thereafter. What is the expected dividend per share for each of the next 5 years? D1 , D2, D3, D4, D5

- Tresnan Brothers is expected to pay a $1.70 per share dividend at the end of the year (i.e., D1 = $1.70). The dividend is expected to grow at a constant rate of 9% a year. The required rate of return on the stock, rs, is 15%. What is the stock's current value per share?

Answer 1

a) We can calculate the expected dividend for next 5 years as follows

Year	Dividend (a)	Growth Rate (b)	Dividend for next year (a*b)
0	$ 3.25	12%	$ 3.64 (D1)
1	$ 3.64	12%	$ 4.08 (D2)
2	$ 4.08	12%	$ 4.57 (D3)
3	$ 4.57	5%	$ 4.80 (D4)
4	$ 4.80	5%	$ 5.04 (D5)
5	$ 5.04

b) We can calculate the current value of stock as follows:

= Expected Dividend / (Required return - Growth rate)

= 1.70 / (15% - 9%)

= 1.70 / 6%

= $ 28.33

So, the current value of stock comes out to be $ 28.33.

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