Question

2. The firm is expected to distribute the following dividend over the follow years:

Year 1 D₁ = $1.5;

Year 2 D₂ = $2.0;

Year 3 D₃ = $2.2;

Starting from year 4, the dividend will be growing at 5% for two years, and then the growth rate will drop to 2%

1. List the annual dividend payment for year 4-8
2. Calculate the present value of the dividends as the price of the stock (as of today), assume the discount rate is 10%

Answer 1

Solution:-

Annual Dividend payments for year 4-8
Year	Dividend	Working
1	1.5000	-
2	2.0000	-
3	2.2000	-
4	2.3100	2.2*1.05
5	2.4255	2.31*1.05
6	2.4740	2.4255*1.02
7	2.5235	2.4740*1.02
8	2.5740	2.5235*1.02

Calculation of Present value of the Dividends as the Price of Stock
Year	Dividend (a)	Present Value @10% (b)	Present Value (a)*(b)	Working of Present value
1	1.5000	0.9091	1.3636	1/1.10^1
2	2.0000	0.8264	1.6529	1/1.10^2
3	2.2000	0.7513	1.6529	1/1.10^3
4	2.3100	0.6830	1.5778	1/1.10^4
5	2.4255	0.6209	1.5060	1/1.10^5
6	2.4740	0.5645	1.3965	1/1.10^6
7	2.5235	0.5132	1.2949	1/1.10^7
8	2.5740	0.4665	1.2008	1/1.10^8
Price of the Stock	11.6455