Question

when we use the calculator for this problem,

n=9, PV = -0.7, PMT = 0, and FV = 2.11

why is the PMT zero when the investors still receive dividend every year?

can we use the CF function on calculator and input all divends. for ex, CF0 = 0.7, CF1 = 0.8, etc.

Problem Johnson & Johnson paid the following dividends per share from 2001 to 2010: Johnson & Johnson Annual Dividends 2001 2002 2003 2001 2002 2003 2004 | 2005 | 2006 | 2007 | 2008 | 2009 | 2010 2004 2005 2006 2007 2008 2009 2010 $0.70 $0.80 $0.925 $1.095 $1.275 $1.455 $1.59 $1.795 $1.93 $2.11 If you believe Johnson & Johnson will continue this dividend pattern forever and you want to earn 17% on your investment, what would you be willing to pay for the company's stock as of January 1, 2011? Solution First, we need to estimate the annual growth rate of this dividend stream. We can determine the average growth rate with a shortcut that uses the first and last dividends in

Answer 1

The PMT is zero because we are calculating the implied dividend growth rate during the period 2001-2010, when the dividend grows from $0.70 to $2.11. That is, we treat $0.70 as the present value, and $2.11 as the future value. We do not consider the dividends in the between years. Therefore PMT is zero.

If the growth rate is g, then $2.11 = $0.70 * (1 + g)⁹. We are solving for g.  

can we use the CF function on calculator and input all dividends. for ex, CF0 = 0.7, CF1 = 0.8, etc.?

No, this is not the correct method. That is because we need to calculate the implied growth rate from the first to last dividend. Hence, the cash flows in the between years should not be considered.