Briley, Inc., is expected to pay equal dividends at the end of each of the next two years. Thereafter, the dividend will grow at a constant annual rate of 4.6 percent, forever. The current stock price is $51. |
What is next year’s dividend payment if the required rate of return is 13 percent? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) |
Dividend payment |
Next Year's dividend payment will be $ 4.47.
As per the dividend discount model, current stock price is the present value of future dividends. | |||||||||
Step-1:Present value of equal dividend of next 2 years | |||||||||
Present value | = | D*(1+0.13)^-1 | + | D*(1+0.13)^-2 | |||||
= | 0.884956 | D | + | 0.783147 | D | ||||
= | 1.668102 | D | |||||||
Step-2:Present value of dividends after year 2 | |||||||||
Present value | = | D2*(1+g)/(Ke-g)*DF2 | Where, | ||||||
= | D*(1+0.046)/(0.13-0.046)*0.783147 | D2 | = | Dividend of year 2 | = | D | |||
= | 9.752041 | D | g | = | Growth rate | = | 4.60% | ||
Ke | = | Required return | = | 13% | |||||
DF2 | = | Discount factor | = | 0.783147 | |||||
Step-3:Calculation of next year's dividend | |||||||||
As per dividend discount model, price of stock is the sum of present value of dividends. | |||||||||
As per question, | |||||||||
Current stock price | = | Sum of present value of future dividends | |||||||
$ 51.00 | = | 1.668102 | D | + | 9.752041 | D | |||
$ 51.00 | = | 11.42014 | D | ||||||
D | = | $ 4.47 | |||||||
So, next years dividend will be $ 4.47 |
Briley, Inc., is expected to pay equal dividends at the end of each of the next...
Briley, Inc., is expected to pay equal dividends at the end of each of the next two years. Thereafter, the dividend will grow at a constant annual rate of 4.6 percent, forever. The current stock price is $51. What is next year’s dividend payment if the required rate of return is 13 percent? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) Dividend payment
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