Question

Burton corp. is growing quickly. dividends are expected to grow at a rate of 31 percent for the next three years, with the growth rate falling off to a constant 6.1 percent thereafter. the required return is 12 percent and the company just paid a dividend of $2.80. what are the dividends each year for the next four years

Answer 1

Current year dividend (D0) = $2.80

Dividend for the first year (D1) = $2.80*1.31 = $3.67

Dividend for the second year (D2) = $2.80*1.31^2 = $4.81

Dividend for the third year (D3) = $2.80*1.31^3 = $6.29

Dividend for the fourth year (D4) = $2.80*1.06 = $6.67

Price of the stock at the third year (P3) = $6.67/(0.12-0.06) = $111.21

Current Price of the dividend (P0) = $3.67/1.12 + $4.81/1.12^2 + $6.29/1.12^3 +$111.21/1.12^3

Current Price of the dividend (P0) = $3.28 + $4.29 + $5.62 + $79.15

Current Price of the dividend (P0) = $92.34