Question

Riggs Inc. has seen non-constant dividend growth in recent years. Dividends are expected to grow at rates of 20%, 15% and 10% for the next three years respectively. After that, dividend is expected to remain constant at a rate of 5%. Riggins Riggs has a required rate of return of 10%. a. If the last paid dividend, D0, was $2.50, what would Riggins Riggs stock be worth today? b. What would the capital gains and dividend yield equal in the first year? c. What would be the dividend yield and capital gains once the period of non-constant growth ends and dividends are expected to grow at a rate of 5%?

Answer 1

a.
	Growth	Dividend
D0      =		2.5
D1      =	20%	3.0
D2      =	15%	3.5
D3      =	10%	3.8
D4      =	5%	4.0
r         =	10%
Value of Stock	=	D1	+	D2	+	D3	+	D(t+1)
		(1+r)		(1+r)^2		(1+r)^3		(r-g) *(1+r)^4
Value of Stock (P0)		62.86
b.
Dividend yield		D1/P0		4.8%
c.
Capital Gain Yield (g)		5%
Dividend yield	(D4/Price)	6%
Total Yield		11.3%