Question

3.Griffin Corporation has decided to alter their dividend policy starting next year. They just paid out $1.75 per share in dividends and are planning a major expansion over the next 4 years. They have announced that they will not pay any dividends during this expansion period. Starting in year 5, they will resume their historical dividend payout of $1.75 a share. They plan on increasing this dividend by 3% each year, thereafter. If shareholders require a 12% return on this stock, what should the stock be selling for in the market

Answer 1

$12.36

Step-by-step explanation:

Div₀ = $1.75

Div₁ = $0

Div₂ = $0

Div₃ = $0

Div₄ = $0

Div₅ = $1.75

Div₆ = $1.8025

first we must determine the terminal value at year 5 = Div₆ / (Re - g) = $1.8025 / (12% - 3%) = $20.03

now we must discount the future dividends using Re = $1.75/1.12⁵ + $20.03/1.12⁵ = $0.99 + $11.37 = $12.36