15. Kakao is expected to pay annual dividends of s1.90 and $2.10 over the next t

Question

15. Kakao is expected to pay annual dividends of s1.90 and $2.10 over the next two years, that, the company expects to pay a c required return of 16 percent? onstant dividend of $2.30 a share. What is the value of this stock at a A. $12.44 B. $13.30 C. $13.89 D. $14.08 E. $14.60 6. Dunkin Donuts just paid an annual dividend of $1.10 a share. The firm expects to increase this dividend by 8 percent per year the following three years and then decrease the dividend growth to 2 percent annually thereafter Which one of the following is the correct computation of the dividend for year 7? A. (S1.10) (1.08 x 3) (1.02 4) B. (S1.10) (1.08 3) (1.02 x 3) C. (S1. 10) (1.08) (1.02) D. (SI.10) (1.08) (102) E. (S1.10) (1.08) (1.02)

Explanation / Answer

Answer- 15:

Dividend in Year 1 = 1.90

Dividend in Year 2 = 2.10

Dividend in Year 3 = 2.30

Since after 3rd year company will pay constant dividend then the price of share in Year 3 (P3) = D/ke = 2.30/ 0.16 = 14.375

Current Value of Share (P0) = {Div1/ (1+ Ke)^1} + {Div2/ (1+ ke)^2} + {Div3 + P3/(1 + Ke)^3}

                              = {1.90/ (1 + 0.16)^1} + {2.10/ (1 + 0.16)^2 }+ {2.30 + 14.375/ (1+ 0.16)^3}

                              = 13.886 or 13.89

Hence, Option C is correct.

Answer- 16:

Dividend for current year = 1.10

Growth rate for dividend for next 3 years = 8%

Growth rate for dividend for next 4 years = 2%

Dividend (year 7) = 1.10 (1 + 8%)^3 (1 + 2%)^4 = 1.10 (1.08)^3 (1.02)^4

Hence Option – C is correct.

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