Problem 8-19 Supernormal Growth [LO1] Frey Corp. is experiencing rapid growth. D

Question

Problem 8-19 Supernormal Growth [LO1]

Frey Corp. is experiencing rapid growth. Dividends are expected to grow at 25 percent per year during the next three years, 15 percent over the following year, and then 7 percent per year indefinitely. The required return on this stock is 12 percent, and the stock currently sells for $88 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))

Frey Corp. is experiencing rapid growth. Dividends are expected to grow at 25 percent per year during the next three years, 15 percent over the following year, and then 7 percent per year indefinitely. The required return on this stock is 12 percent, and the stock currently sells for $88 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))

Explanation / Answer

let dividend be D, then present value of stock will be -

D(1.25)/1.12 + D(1.25)2/(1.12)2 +D(1.25)3/(1.12)3 + D(1.25)3(1.15)/(1.12)4 + D(1.25)3(1.15)(1.07)/(0.12 - 0.07)(1.12)5 = 88

D(1.25) [0.89 + 1 1.11 + 1.132 + 24.23] = 88

D = 2.48

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