Question

Grandiose Growth has a dividend growth rate of 20%. The discount rate is 15%. The end-of-year dividend will be $3 per share. What is the present value of the dividend to be paid in year 1? Year 2? Year 3?

Answer 1

The present value of dividend to be paid at the end of year 1, year 2, and year 3 are $2.60, $2.95, and $2.84 respectively.

Step-by-step explanation:

The end of the year dividend is $3 per share.

The dividend growth rate is 20%.

The discount rate is 15%.

PV of dividend to be paid at the end of year 1

=
`(end\ of\ the\ year\ dividend)/((1+discount\ rate)^n)`

=
`(3)/((1 + .15)^1)`

=
`(3)/(1.15)`

=$2.60

PV of dividend to be paid at the end of year 2

=
`(end\ of\ the\ year\ dividend)/((1 + discount\ rate)^n)`

=
`(3* (1+.20))/((1+.15)^2)`

=
`(3.60)/(1.322)`

=$2.72

PV of dividend to be paid at the end of year 3

=
`(end\ of\ the\ year\ dividend)/((1 + discount\ rate)^n)`

=
`(3* (1+.20)^2)/((1+.15)^3)`

=
`(4.32)/(1.52)`

=$2.84