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In: Finance

Fresno Corp. is a fast-growing company whose management that expects to grow at a rate of...

Fresno Corp. is a fast-growing company whose management that expects to grow at a rate of 26 percent over the next two years and then to slow to a growth rate of 20 percent for the following three years. The required rate of return is 14 percent. If the last dividend paid by the company was $2.15.

What is the dividend for 1st year? (Round answer to 3 decimal places, e.g. 15.250.)

D1 $

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What is the dividend for 2nd year? (Round answer to 3 decimal places, e.g. 15.250.)

D2 $

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What is the dividend for 3rd year? (Round answer to 3 decimal places, e.g. 15.250.)

D3 $

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What is the dividend for 4th year? (Round answer to 3 decimal places, e.g. 15.250.)

D4 $

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What is the dividend for 5th year? (Round answer to 3 decimal places, e.g. 15.250.)

D5 $

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Compute the present value of these dividends if the required rate of return is 14 percent. (Round intermediate calculations and final answer to 2 decimal places, e.g. 15.20.)

Present value $

Solutions

Expert Solution

This question is based on multiple period dividend discount model.

The company paid last dividend of $2.15. This is D0

g is the growth rate

Re is the required rate of return

Calculation of D1 or dividend for year 1

The growth rate for first two years is 26%

= D0 * (1+g)

= $2.15 * (1 + 0.26)

= $2.15 * 1.26

= $2.709

Calculation of D2 or dividend for year 2

= D1 * (1+g)

= $2.709 * (1 + 0.26)

= $2.709 * 1.26

= $3.413

Calculation of D3 or dividend for year 3

Now the growth rate is 20%

= D2 * (1+0.20)

= $3.413 * (1 + 0.20)

= $3.413 * 1.20

= $4.096

Calculation of D4 or dividend for year 4

= D3 * (1+0.20)

= $4.096 * (1 + 0.20)

= $4.096 * 1.20

= $4.915

Calculation of D5 or dividend for year 5

= D4 * (1+0.20)

= $4.915 * (1 + 0.20)

= $4.915 * 1.20

= $5.898

Calculation of present value of dividends @14%

Rounding the answer to two decimal places

=$13.74

Note - How did we calculate the discounting factors @14%

Year 1

= 1/1.14

= 0.8771929825

Year 2

= 0.8771929825 / 1.14

= 0.7694675285

Year 3

= 0.7694675285 / 1.14

= 0.6749715162

Year 4

= 0.6749715162 / 1.14

= 0.5920802774

Year 5

= 0.5920802774 / 1.14

= 0.5193686644

jeff jeffy answered 2 years ago
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