Frey Corp is experiencing rapid growth Dividends are expecte

Frey Corp is experiencing rapid growth Dividends are expected to grow at 30 percent per year during the next three years, 20 percent over the following year, and then 6 percent per ye return on this stock is 10 percent, and the stock currently sells for $76 per share. What is the p dividend for the coming year? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g. 32.16) ar indefinitely The required Projected dividend

Solution

Assume Dividend of year 1 be “x”

Year

Event

Cash flow

Present Value Factor @10%

Discounted Cash flow

1

Dividend on Year1

Assumption

x

0.9091

0.9091x

2

Dividend on Year 2

X+30% growth

1.3x

0.8264

1.07432x

3

Dividend on Year 3

1.3 x + 30% growth

1.69x

0.7513

1.269697x

4

Dividend on Year 4

1.69+20% growth

2.028x

0.6830

1.385124x

4

Price on Year 4

Refer note 1

53.742x

0.6830

36.705786

41.344027x

Price on Year 0 = 41.344027x

76 = 41.344027x

X = 76/41.344027 = 1.84

Projected dividend of year 1 (coming year) = 1.84

Note 1:

Price of year 4 = Dividend on year 4*(1+growth rate)/Required return – Growth rate

= 2.028x*(1+0.06)/0.10-0.06

=2.028x*(1.06)/0.04

=2.14968x/0.04

=53.742x

Year	Event		Cash flow	Present Value Factor @10%	Discounted Cash flow
1	Dividend on Year1	Assumption	x	0.9091	0.9091x
2	Dividend on Year 2	X+30% growth	1.3x	0.8264	1.07432x
3	Dividend on Year 3	1.3 x + 30% growth	1.69x	0.7513	1.269697x
4	Dividend on Year 4	1.69+20% growth	2.028x	0.6830	1.385124x
4	Price on Year 4	Refer note 1	53.742x	0.6830	36.705786
					41.344027x