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

Question

Momsen 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 4 percent per year indefinitely. The required return on this stock is 10 percent, and the stock currently sells for $64 per share. What is the projected dividend for the coming year?

Momsen 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 4 percent per year indefinitely. The required return on this stock is 10 percent, and the stock currently sells for $64 per share. What is the projected dividend for the coming year?

Explanation / Answer

Let dividend (D0) just paid be D0

D1 = D0(1.26)

D2= D0(1.26)^2

D3 =D0 (1.26)^3

D4 = D0(1.26)^3(1.16)

Terminal value at year 4 = D0(1.26)^3(1.16)(1.04) /(.10-.04)

                                    =D0(1.26)^3(1.16)(1.04)/ .06

Now ,Present value of dividend @10%(PVF can be available from present value table) should be = current price(64)

[D0*1.26 * .90909) ] + [D0(1.26)^2*.82645] +[D0(1.26)^3*.75131] +[D0(1.26)^3(1.16).68301] +[D0(1.26)^3(1.16)(1.04)*.68301 /.06]

[D0 * 1.145 ] +[D0* 1.312 ]+[D0*1.503 ]+[D0*1.585]+[D0 *27.471] =     64

33.016 D0 =64

D0 = 64/33.016

       = 1.938

D1 (dividend for next year) = 1.938* (1.26)

                                      = 2.442 per share

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