Frey Corp. is experiencing rapid growth. Dividends are expected to grow at 24 pe

Question

Frey Corp. is experiencing rapid growth. Dividends are expected to grow at 24 percent per year during the next three years, 14 percent over the following year, and then 8 percent per year indefinitely. The required return on this stock is 10 percent, and the stock currently sells for $86 per share. What is the projected dividend for the coming year? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

Projected dividend = $ ?????

Frey Corp. is experiencing rapid growth. Dividends are expected to grow at 24 percent per year during the next three years, 14 percent over the following year, and then 8 percent per year indefinitely. The required return on this stock is 10 percent, and the stock currently sells for $86 per share. What is the projected dividend for the coming year? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

Projected dividend = $ ?????

Explanation / Answer

let the projected dividend for the coming year be D1

D2 = 1.24*D1

D3 = 1.24^2*D1

D4 = 1.24^2*1.14*D1

let the price of the stock at the end year 4 be P4

P4 = D5/(r-g) = D4*(1+g)/(r-g) = 1.24^2*1.14*D1*1.08/(0.1-0.08)

let the price of the stock now be P0

P0 = D1/(1+r) + D2/(1+r)^2 + D3/(1+r)^3 + D4/(1+r)^3 + P4/(1+r)^3

86 = D1/1.1 + 1.24*D1/1.1^2 + 1.24^2*D1/1.1^3 + 1.24^2*1.14*D1/1.1^4 + 1.24^2*1.14*D1*1.08/(0.1-0.08)/1.1^4

D1 = 1.25

Thus, Projected dividend is $1.25

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