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 4.1 percent, forever. The current stock price is $46. What is next year’s dividend payment if the required rate of return is 12 percent? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

dividend payment=

Answer 1

Let us assume dividend paid for next two years = x

Value of stock is present value of all cash flows from the stock.

D1 = x

D2 = x

D3 = x ×(1+g) = x × 1.041

From D3 period the dividend will grow at 4.1% per year.

So, we calculate the terminal value at D2 period.

Terminal value at D2 = D3 / (r -g) = x × 1.041 / (0.12 - 0.041)

Terminal value at D2 period = 13.1772151899 x

Value of stock = D1 / (1+r) + D2 /(1+r)² + terminal value at D2/(1+r)²

46 = x / (1+0.12) + x /(1+0.12)² + 13.177151899 x /(1+0.12)²

Apply LCM

46 = [ x×1.12 + x + 13.177151899 x ] / (1.12)²

57.7024 = 15.2972151899 x

X = 57.7025 / 15.2972151899

Next year dividend = $ 3.7720852641= $ 3.77