At the end of the year 2011 the BRK Corporation paid dividends $0.25 per share.

Question

At the end of the year 2011 the BRK Corporation paid dividends $0.25 per share. The company projects the following annual growth rates in dividends:
Year Growth Rate

2012 15%
2013 15%
2014 15%
2015 13%
2016 11%
2017 9%

From year 2018 onward growth in dividends is expected to remain constant at 7% per year. The stock has a beta of 1.0 and the current market price is $55. Currently the yield on 10-year Treasury notes is 5% and the market risk premium is 4%

13. Calculate the present value now (end of the Year 2011) of dividends during the period of declining growth (that is for years 2015 to 2017).

Explanation / Answer

re =5%+1*4% =9% Dividend for 2012 =$0.25*1.15=0.2875 Dividend for 2013 =$0.25*1.15^2=0.330625 Dividend for 2014 =$0.25*1.15^3 =0.38021875 Dividend for 2015 =$0.25*1.15^3*1.13=0.429647188 Dividend for 2016 =$0.25*1.15^3*1.13*1.11=0.476908378 Dividend for 2017=$0.25*1.15^3*1.13*1.11*1.09=0.519830132 Dividend for 2018=$0.25*1.15^3*1.13*1.11*1.09*1.07 =0.556218241 13. present value of dividends during the period of declining growth =0.429647188/1.09^4 +0.476908378/1.09^5 + 0.519830132/1.09^6 =0.924288346

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