Burton Corp is growing quickly Dividends are expected to gro

Burton Corp. is growing quickly. Dividends are expected to grow at a rate of 30 percent for the next three years, with the growth rate falling off to a constant 6 percent thereafter. The required return is 13 percent and the company just paid a dividend of $2.75 What are the dividends each year for the next four years? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.) Year 1 Year 2 Year 3 Year 4 What is the share price in three years? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) Share price in 3 years What is the current share price? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Solution

Dividend now = 2.75
Growth rate from 1-3 years = 30%
Growth rate from 4th year = 6%
Dividend for Year 1 = 2.75 * ( 1+ 30%) = 3.58
Dividend for Year 2 = 2.75 * ( 1+ 30%)² = 4.65
Dividend for Year 3 = 2.75 * ( 1+ 30%)³ = 6.04
Dividend for Year 4 = 2.75 * (1+ 30%)³ * ( 1+6%) = 6.40/

Share Price in 3 years = Dividend for Year 4/(Required Return -Constant Growth) = 6.404255/(13%-6%) =91.49

Current Price of share = Dividend 1 /(1+r) + Dividend 2/(1+r)² + Dividend 3/(1+r)³ + Share price in year 3/(1+r)³ =74.40

Best of Luck. God Bless