Frey Corp. is experiencing rapid growth. Dividends are expected to grow at 25 pe

Question

Frey Corp. is experiencing rapid growth. Dividends are expected to grow at 25 percent per year during the next three years, 15 percent over the following year, and then 7 percent per year indefinitely. The required return on this stock is 12 percent, and the stock currently sells for $88 per share. What is the projected dividend for the coming year?

Frey Corp. is experiencing rapid growth. Dividends are expected to grow at 25 percent per year during the next three years, 15 percent over the following year, and then 7 percent per year indefinitely. The required return on this stock is 12 percent, and the stock currently sells for $88 per share. What is the projected dividend for the coming year?

Explanation / Answer

use DDM (Gordon growth model)....
Price = D1/(1+r) + D2/(1+r)^2 +...+ D4/1.12^4 + [(D5/(r - g)]/1.12^4

x = D0

88 = 1.25x/1.12 + 1.25^2x/1.12^2 + 1.25^3x/1.12^3 + (1.25^3*1.15)x1.12^4 + [(1.25^2*1.15)(1.07)x/(0.12 - 0.07)] /1.12^4

88 = 1.25x/1.12 + 1.5625x/1.12^2 + 1.95313x/1.12^3 + 2.24609x1.12^4 + 38.453x/1.12^4
x = 2.971 <D0

D1 = D0 * 1.25 = 2.971 *1.25 = 3.7137, or about $3.71 dividend next year...

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