ABC Inc. just paid (D0) $3.00 dividend per share. The dividend growth rate is ex

Question

ABC Inc. just paid (D0) $3.00 dividend per share. The dividend growth rate is expected to be constant (per year) at 15% for the next four years, after which dividends are expected to grow at a rate jof 5% forever. ABC's required return (rs) is 10%. Answer the questions showing the steps that you follow, (calculations)

a. what is the expected dividend at the end of first year (at t =1)?

b. what is the expected dividend at the end of the second year (at t =2)?

c. what is the expected dividend at the end of the third year (at t =3)?

d. what is the expected dividend at the end of the fourth year (at t = 4)?

e. what is the expected dividend at the end of the fifth year (at t = 5)?

e. What is the current price of ABC’s stock ?

Explanation / Answer

Part a)

Dn = Do x (1+g)^n

     D1 = 3 x (1+0.15)^1

     = $3.45

Part b)

Dn = Do x (1+g)^n

   D2 = 3 x (1+0.15)^2

     = $3.97

Part c)

Dn = Do x (1+g)^n

   D3 = 3 x (1+0.15)^3

     = 4.56

Part d)

Dn = Do x (1+g)^n

    D4 = 3 x (1+0.15)^4

    = $5.25

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