Question

Mobray Corp. is experiencing rapid growth. Dividends are expected to grow at 32 percent per year during the next three years, 22 percent over the following year, and then 7 percent per year indefinitely. The required return on this stock is 10 percent, and the stock currently sells for $78 per share. What is the projected dividend for the coming year

Answer 1

$1.3794

Step-by-step explanation:

The computation of the projected dividend for the coming year is shown below:

Last year dividend paid = Do

Expected Dividend in Year 1 (D1) = Do ( 1+g) = Do × 1.32

Dividend in Year 2 (D2) = Do ( 1+g)^2 = Do × 1.32^2

Dividend in Year 3 (D3) = Do ( 1+g)^3 = Do × 1.32^3

Dividend in year 4 , (D4) = D3 × (1+g) = Do × 1.32^3 × 1.22

Now the price at year 4 is

P4 = D4 × (1+g) ÷ ( R-g )

= Do × 1.32^3 × 1.22 × (1 + 0.07 ) ÷ ( 0.10 - 0.07 )

= Do × 100.08

Use Gordon Growth Model

The Current Price of Stock is

= D1 ÷ ( 1+ R)^1 +D2 ÷ ( 1+ R)^2 + D3 ÷ ( 1+ R)^3 + D4 ÷ ( 1+ R)^4 + P4 ÷ ( 1+ R)^4

$78 = Do ( 1.32 ÷ 1.1 + 1.32^2 ÷ 1.1 ^2 + 1.32^3 ÷ 1.1^3 +1.32^3 × 1.22 ÷ 1.1^4 + 100 .08 ÷ 1.1^4)

$78 = Do ( 1.2 +1.44 + 1.728 + 1.9165 + 68.36 )

Do = $1.045

Now

Projected Dividend for Year 1 is

= Do × 1.32

= $1.045 × 1.32

= $1.3794