Janicek Corp. is experiencing rapid growth. Dividends are expected to grow at 26

ID: 2770039 • Letter: J

Question

Janicek Corp. is experiencing rapid growth. Dividends are expected to grow at 26 percent per year during the next three years, 16 percent over the following year, and then 6 percent per year indefinitely. The required return on this stock is 15 percent, and the stock currently sells for $74 per share. What is the projected dividend for the coming year?

Explanation / Answer

Solution;

Let assume company paid recently dividend “D”

We can find out the projected dividend for coming year by using following method and calculations:

The current value of stock is the sum of following:

(i) Present Value of Projected dividend payment from Year 1 - 4

(ii) Present Value of Stock Price at the end of year 4 calculated by using dividend growth model at 6% per year constant growth rate on 15% required rate of return

Present Value of Projected dividend payment from Year 1 - 4

Year

Dividend

PV factor @ 15%

Present Value of Dividend

D1 = Do x (1 + Growth Rate) or

D x 1.26 = 1.26D

0.870

1.10 D

1.26D x 1.26 = 1.5876D

0.756

1.20 D

1.5876D x 1.26 = 2D

0.658

1.32 D

2D x 1.16 = 2.32D

0.572

1.33 D

4.94 D

Stock Price at the end of Year 4 = D5 / (Required Return – Growth Rate)

= (2.32D x 1.06) / (0.15 – 0.06)

= 2.4592D / 0.09

= 27.324D

Present Value of $27.32D as on today = $27.324D x 0.572 = $15.629

Current Price of Stock = $74 (given in the question)

Hence Current Price of Stock = $4.94D + $15.629D = $74

20.569D = $74

D = $74 / 20.569

D = $3.597 or $3.60

Since D is recently paid dividend.

Next Year Project Dividend = Recently paid dividend (D) x (1 + Growth Rate)

= $3.60 x (1 + 0.26)

= $4.536 or $4.54