Fresno Corp. is a fast-growing company that expects to grow at a rate of 24 perc

Question

Fresno Corp. is a fast-growing company that expects to grow at a rate of 24 percent over the next two years and then to slow to a growth rate of 15 percent for the following three years. If the last dividend paid by the company was $2.15.

What is the dividend for 1st year?

What is the dividend for 2nd year?

What is the dividend for 3rd year?

What is the dividend for 4th year?

What is the dividend for 5th year?

Compute the present value of these dividends if the required rate of return is 14 percent.

Explanation / Answer

Hi,

Please find the detailed answer as follows:

Dividend for 1st Year = 2.15*(1+.29) = 2.7735

Dividend for 2nd Year = 2.15*(1+.29)^2 = 3.5778

Dividend for 3rd Year = 2.15*(1+.29)^2(1+.18)^1 = 4.2218

Dividend for 4th Year = 2.15*(1+.29)^2*(1+.18)^2 = 4.9817

Dividend for 5th Year = 2.15*(1+.29)^2*(1+.18)^3 = 5.8785

Present Value of Dividends = 2.7735/(1+.14)^1 + 3.5778/(1+.14)^2 + 4.2218/(1+.14)^3 + 4.9817/(1+.14)^4 + 5.8785/(1+.14)^5 = 14.038 or 14.03

Answer is 14.038 or 14.04.

Thanks.

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