Beachmaster Suntan Oil’s dividend is expected to grow at a 20% rate each of the

Question

Beachmaster Suntan Oil’s dividend is expected to grow at a 20% rate each of the next 2 years. After that, dividend growth is expected to normalize at about 8.5% annually. Beachmaster just paid a $2.25 annual dividend per share. The require rate of the return of the stock is 10%.

1.Draw the time line of the stock’s CFs?

2.What is the forecasted dividend for each of the next 2 years (D1 and D2)?

3.What is the forecasted dividend 3 years from now?

4.At what price do you foresee Beachmaster’s stock selling 2 years from now (what is your forecasted P2)?

5.What are the present values of D1, D2, and P2?

6.What is your estimated stock price today?

Explanation / Answer

Solution.

D0 = $2.25

D1 = $2.25 ( 1 + .20 ) = $2.7
D2 = $2.7 ( 1.20 ) = $3.24

D3 = $3.24 ( 1 + 0.085 ) = $3.52.

Related Questions

Navigate

• Browse (All)
• Browse B
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.