Yang Corp. is growing quickly. Dividends are expected to grow at a rate of 32 pe
ID: 2749754 • Letter: Y
Question
Yang Corp. is growing quickly. Dividends are expected to grow at a rate of 32 percent for the next three years, with the growth rate falling off to a constant 7.7 percent thereafter. The required return is 14 percent and the company just paid a $1.80 dividend.
What are the dividends each year for the next four years?
Year 1:
Year 2:
Year 3:
Year 4:
What is the share price in three years?
What is the current share price?
Yang Corp. is growing quickly. Dividends are expected to grow at a rate of 32 percent for the next three years, with the growth rate falling off to a constant 7.7 percent thereafter. The required return is 14 percent and the company just paid a $1.80 dividend.
Explanation / Answer
Calculation of Dividend:
Year 1 = 1.80 x 1.32 = $2.38
Year 2 = 2.38 x 1.32 = $3.14
Year 3 = 3.14 x 1.32 = $4.14
Year 4 = 4.14 x 1.077 = $4.46
Share Price in three years = D4 / K - G
D4 = Dividend in Year 4 = 4.46, K = Cost of capital = 14%, G = Growth rate = 7.7%
Price = 4.46 / 0.14 - 0.077
Price in Year 3 = $70.79
Current Price:
Present Value of Year 3 Return = 70.79 + 4.14 / (1+0.14)^3 = 50.58
Present Value of Year 2 Return = 3.14 / (1.14)^2 = $2.42
Present Value of Year 1 Return = 2.38 / (1.14)^1 = 2.09
Total = 50.58 + 2.42 + 2.09 = $55.09
So, current share price is $55.09
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