Question

CraigTool Company just paid a dividend of $1.25 per share. The company plans to increase its dividend by 24% next year and then reduce its dividend growth rate by 10% per year until it reaches the industry average of 4% dividend growth, after which it is expected the company will maintain a constant growth rate forever. The stock has a required return of 8%. What dividend amount is this company's stock expected to pay 3 years from now?

Answer 1

CraigTool Company's stock is expected to pay a dividend of $1.84 per share 3 years from now.

Step-by-step explanation:

To calculate the dividend amount that CraigTool Company is expected to pay 3 years from now, we need to find the future dividends based on the given information. According to the question, the company plans to increase its dividend by 24% next year, and then reduce the dividend growth rate by 10% per year until it reaches the industry average of 4% dividend growth. So, let's calculate the future dividends:

1. Year 1: Dividend = $1.25 * (1 + 24%) = $1.55
2. Year 2: Dividend = $1.55 * (1 + 14%) = $1.77
3. Year 3: Dividend = $1.77 * (1 + 4%) = $1.84

Therefore, CraigTool Company's stock is expected to pay a dividend of $1.84 per share 3 years from now.