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25 November, 01:33

Tattletale News Corp. has been growing at a rate of 20% per year, and you expect this growth rate in earnings and dividends to continue for another 3 years.

a. If the last dividend paid was $2, what will the next dividend be? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

b. If the discount rate is 15% and the steady growth rate after 3 years is 496, what should the stock price be today? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

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  1. 25 November, 01:54
    0
    a) Next dividend = $2.40

    b) Stock price today = $30.31

    Explanation:

    The value of a stock, using the dividend valuation model, is the Present value of its future cash flows discounted at the required rate of return.

    Value of Next dividend:

    Last Div 2.00

    Next dividend = 1.20*2.00 = $2.40

    Value of stock today:

    Workings Dividend

    Last Div 2.00

    Year 1 1.20*2.00 2.40

    Year 2 1.20 * 2.40 2.88

    Year 3 1.20*2.88 3.46

    Year 4 1.0496 * 3.46 3.63

    Year Dividend Workings PV of Dividend

    1 2.40 2.40 * 1.15^ (-1) = 2.09

    2 2.88 2.88 * 1.15^ (-2) = 2.18

    3 3.46 3.46*1.15^ (-3) = 2.28

    4 3.63 3.63 / (0.15-0.0496) = 36.16 (in year 3)

    PV of year 4 div (in year 0) = 36.16 * (1.015^ (-3) = 23.7

    Stock price today = 2.09 + 2.18 + 2.28 + 23.7 = $30.31

    Note that the year 4 dividend had to be re-discounted again to year 0 because the present value calculated in the table is at year 3 terms
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