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21 December, 01:46

Jumbo Shrimp Oxymorons, Inc. recently paid a dividend of $2.12 per share. The firm expects explosive growth of 20% over the next two years. After that the firm's managers expect that growth will drop to 14% for the following three years, then settle at 8% indefinitely. If investors require a rate of return of 15.40% on Jumbo's stock: a. What will be the dividend paid out for the next six years?

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  1. 21 December, 02:00
    0
    D6 = $4.885/4.89

    Explanation:

    Given D0 = $2.12

    Three stage growth = 20% for two years, 14% for three years, 8% indefinitely

    Calculate D6

    First stage 20%

    D1 = D0*g = 2.12*1.20 = $2.544

    D2 = D1*g=2.544*1.20 = $3.053

    Second stage 14%

    D3 = D2 * g = 3.053*1.14 = $3.480

    D4 = D3*1.14 = 3.480*1.14 = $3.968

    D5 = D4*g = 3.968*1.14 = $4.523

    Stable growth stage

    D6 = D5*g = 4.523*1.08 = $4.885
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