Question

Biarritz Corp. is growing quickly. Dividends are expected to grow at a rate of 30 percent for the next three years, with the growth rate falling off to a constant 7 percent thereafter. The required return is 13 percent and the company just paid a dividend of $2.60. What are the dividends each year for the next four years

Answer 1

current dividends are $2.60

in one year, the dividends will be = $2.60 x 1.3 = $3.38

in two years, the dividends will be = $3.38 x 1.3 = $4.39

in three years, the dividends will be = $4.944 x 1.3 = $5.71

in four years, the dividends will be = $5.7122 x 1.07 = $6.11

during the next 3 years, dividends grow at 30%, but the during the fourth year they will only grow at 7%