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Mobray Corp. is experiencing rapid growth. Dividends are expected to grow at 25 percent per year...

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Finance

Mobray Corp. is experiencing rapid growth. Dividends areexpected to grow at 25 percent per year during the next threeyears, 15 percent over the following year, and then 6 percent peryear indefinitely. The required return on this stock is 12 percent,and the stock currently sells for $94 per share. What is theprojected dividend for the coming year? (Do not round intermediatecalculations and round your answer to 2 decimal places, e.g.,32.16.)

Answer & Explanation Solved by verified expert
3.9 Ratings (626 Votes)

Projected dividend for the coming year is $ 3.87

Step-1:Calculation of last paid dividend
As per dividend discount model, current share price is the present value of future dividends.
Present value of 4 years dividend:
Year Dividend Discount factor Present value
a b c=1.12^-a d=b*c
1 $       1.25 0.892857 $       1.12
2 $       1.56 0.797194 $       1.25
3 $       1.95 0.71178 $       1.39
4 $       2.25 0.635518 $       1.43
Total $       5.18
Present value of dividend of 4 years thereafter = D4*(1+g)/(Ke-g)*DF4 Where,
= $    25.22 D4 = $       2.25
g = 6%
Ke = 12%
DF4 = 0.635518
Present value of all future dividends = $       5.18 + $    25.22
= $    30.40
Last paid dividend = $    94.00 / $    30.40
= $       3.09
Step-2:Dividend of next year
Dividend for the coming year = $       3.09 * 1.25
= $       3.87

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Transcribed Image Text

Mobray Corp. is experiencing rapid growth. Dividends areexpected to grow at 25 percent per year during the next threeyears, 15 percent over the following year, and then 6 percent peryear indefinitely. The required return on this stock is 12 percent,and the stock currently sells for $94 per share. What is theprojected dividend for the coming year? (Do not round intermediatecalculations and round your answer to 2 decimal places, e.g.,32.16.)

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