Business, 03.03.2020 16:27 katerin5168

Nonconstant Growth. Tattletale News Corp. has been growing at a rate of 20% per year, and you expect this growth rate in earnings and dividends to continue for another 3 years.

a. If the last dividend paid was $2, what will the next dividend be?
b. If the discount rate is 15% and the steady growth rate after 3 years is 4%, what should the stock price be today?

Answers: 3

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Answers

Dividend is the periodic payment, generally in the cash form, which is made to the shareholders of the company, out of profit of the company as a partial return on their investment in the company.

Solution:-

A. As it is known that the growing rate is 20%, then, calculate the dividend amount in year 1:

$div_{1} =Dividend in last year*growth rate\\div_{1} =$2*1.20div_{1} =$2.40$

B. Calculate the current price but before that first calculate the dividend for next 3 years and then calculate the price at year 3 and finally calculate the current price:

$div_{2} =Dividend in 1st year*growth rate =$2.40*1.20=$2.88$

Dividend at year 3:

$div_{3} =Dividend in 2nd year*growth rate=$2.88*1.20=$3.456$

Now calculate the price at year 3:-

$p_{3} =\frac{DIV_{3}*(1+G) }{R-G} p_{3}=\frac{3.456*1.04}{0.15-0.04} \\p_{3}=$32.675$

Finally calculate the current price:-

$p_{0}=\frac{DIV_{1} }{1+R} +\frac{DIV_{2} }{1+R}2+.......+\frac{DIV_{H} }{1+R}H+\frac{P_{H} }{1+R} H\\$

$P_{0} =\frac{2.40}{1.15} +\frac{2.88}{1.15}2+\frac{3.456+32.675}{1.15}3\\P_{0} =$28.021$

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Answer from: samueltaye

a) $2.4b) $30.29

Explanation:

a. If the last dividend paid was $2, what will the next dividend be?

Next dividend = last dividend + growthNext dividend = last dividend × (1 + growth rate)Next dividend = $2 × (1 + 20%) = $2 × (1 + 0.20) =Next dividend = $2 × (1.20) = $2.4

b. If the discount rate is 15% and the steady growth rate after 3 years is 4%, what should the stock price be today?

You have to calculate the price in two parts: 1) present value of the dividends for 3 years, and 2) present value of the dividends after 3 years.

i) Present value of the dividends for 3 years

Year Dividend PV

1 $2.40 $\dfrac{\$2.40}{(1+0.15)^1}=\$ 2.09$

2 $\$2.40\times (1+0.20)=\$2.88$ $\dfrac{\$2.88}{(1+0.15)^2}=\$ 2.18$

3 $\$2.88\times (1+0.20)=\$3.46$ $\dfrac{\$3.46}{(1+0.15)^3}=\$ 2.27$

The present value of those three dividends is:

$2.09 + $2.18 + $2.27 = $6.54

ii) Present value of the dividends since year 4.

Equation to discount a perpetuity with constant rate g less than the discount rate.

$PV=\dfrac{\text{Dividend one year from now}}{r-g}$

Substitute with:

Dividend the year four = $3.46 × (1.04)r = 0.15g = 0.04

$PV=\dfrac{\$3.46\times (1.04)}{0.15-0.04}=\$ 36.13$

Since that is the value at the end of year 3, you need to discount it to the present day:

$PV_0=\dfrac{\$36.13}{(1+0.15)^3}=\$23.75$

iii) Add the present values of the two streams of dividends:

Price = $6.54 + $23.75 = $30.29 ← answer

Answer from: Quest

The answer is that the answer is and ik it is because the answer is false.

Answer from: Quest

Sorry i don’t know what to do with this

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