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.)

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