Question

do dividends are expected to grow at 25% per year during the next 3 years, 15% over the following year, and then 8% per year. the required return on this stock is 13% and the stock sells for $76 per share today. what is the projected dividend for the coming year

Answer 1

Formula sheet

A1	B	C	D	E	F	G	H	I	J	K
2
3		Growth rate for three years	0.25
4		Growth rate in 4th Year	0.15
5		Terminal growth rate (gL)	0.08
6		Required return (rs)	0.13
7
8		Assuming the Dividend Next Year is D
9		As per dividend growth model, Price of share is the present value of all future dividends.
10		Future dividends can be calculated as follows:
11		Year	0	1	2	3	4	5	6
12		Dividend		D	1.25D	1.25*1.25D	1.15*1.25*1.25D	1.08*1.15*1.25*1.25D	…
13		Dividend		D	1.25D	1.5625D	1.796875D	1.940625D	…
14		Calculation Price of the share at Year 0
15		Required return	=D6
16		Year	0	1	2	3	4	5	6
17		Dividend		=E13	=F13	=G13	=H13	=I13	=J13
18		Terminal value = DIV5/(rs-gL)					=1.940625D/(13%-8%)
19		Terminal value					=38.8125D
20		Present Value Factor		=1/((1+$D$15)^E16)	=1/((1+$D$15)^F16)	=1/((1+$D$15)^G16)	=1/((1+$D$15)^H16)
21		Present value of dividends	=(0.88D+0.78*1.25D+0.69*1.5625D+0.61*(38.8125D+1.796875D)
22		Present value of dividends	=27.85327D
23		Price of share at Year 0	=D22
24
25		Since Price of Share Today is	76
26
27		Therefore Dividend next year i.e. D	=$76/27.85327
28			=D25/27.85327	=D25/27.85327
29
30		Hence Dividend next year is	=D28
31