Question

Mobray Corp. is experiencing rapid growth. Dividends are expected to grow at 30 percent per year during the next three years, 20 percent over the following year, and then 5 percent per year indefinitely. The required return on this stock is 12 percent, and the stock currently sells for $92 per share. What is the projected dividend for the coming year? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Answer 1

Price of share today = present value of dividends of next 4 years + present value of horizon value at end of 4th year.

Present value = future value / (1 + required return)^{number of years}

Horizon value at end of 4th year = Year 5 dividend / (required return - constant growth rate)

First, assume the current dividend to be $2.00. With this assumption, the current price of the share is $62.13

Now, we use GoalSeek function in Excel to determine the current dividend at which current price of share will equal $92.

The current dividend is $2.96

The projected dividend for the coming year is $3.85