Mobray Corp. is experiencing rapid growth. Dividends are expected to grow at 28
ID: 2820807 • Letter: M
Question
Mobray Corp. is experiencing rapid growth. Dividends are expected to grow at 28 percent per year during the next three years, 18 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 $76 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.)
Mobray Corp. is experiencing rapid growth. Dividends are expected to grow at 28 percent per year during the next three years, 18 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 $76 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.)
Explanation / Answer
Solution: Here we have all the we need except current year dividend (i.e D0) , so we have to calculate D0.
we know formula for expected dividend is Dn= D0* FVIF
thus, D3= D0(1.28)^3 and dividend in year 4 (i.e. D4) = D3*(1+g)= D0(1.28)^3(1.18)
As per question stock is having constant growth rate from year 5, so here we can calculate P4 by following formula:
p4 = D4(1+g)/(R-g)
Now substituting the value of D4 in above formula as follows:
P4 = D0(1.28)^3(1.18)(1.05)/(0.12-0.05)
= 37.12D0
Now, since we have given the current stock price in the question, so we will use this to calculate P4. Since, current stock price is the PV of the dividends in all 4 years plus P4
So, now;
P0=PV Of D1 + D2 + D3 + D4 + P4
$76= D0(1.28)/1.12 + D0(1.28)^2/(1.12)^2 + D0(1.28)^3/(1.12)^3 + D0(1.28)^3(1.18)/(1.12)^4 + 37.12D0(1.12)^4
$76=$29.10 D0 (On solving the equation)
D0= $76/29.10
D0= $2.61
Now, we can calculate the projected dividend for the coming year as follows:
D1= D0(1+g)
D1= $2.61(1.28)
D1=$3.34
sorrrry, I was earlier forget to make the discounting of P4.
note: Tell me if it was helpful.