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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