Jumbo Shrimp Oxymorons, Inc. recently paid a dividend of $2.12 per share. The firm expects explosive growth of 20% over the next two years. After that the firm's managers expect that growth will drop to 14% for the following three years, then settle at 8% indefinitely. If investors require a rate of return of 15.40% on Jumbo's stock: a. What will be the dividend paid out for the next six years?

Question

Business

August Herrera

15 September, 01:15

Jumbo Shrimp Oxymorons, Inc. recently paid a dividend of $2.12 per share. The firm expects explosive growth of 20% over the next two years. After that the firm's managers expect that growth will drop to 14% for the following three years, then settle at 8% indefinitely. If investors require a rate of return of 15.40% on Jumbo's stock: a. What will be the dividend paid out for the next six years?

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Answers (1)

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Mareli · Answer 1

D6 = $4.885/4.89

Explanation:

Given D0 = $2.12

Three stage growth = 20% for two years, 14% for three years, 8% indefinitely

Calculate D6

First stage 20%

D1 = D0*g = 2.12*1.20 = $2.544

D2 = D1*g=2.544*1.20 = $3.053

Second stage 14%

D3 = D2 * g = 3.053*1.14 = $3.480

D4 = D3*1.14 = 3.480*1.14 = $3.968

D5 = D4*g = 3.968*1.14 = $4.523

Stable growth stage

D6 = D5*g = 4.523*1.08 = $4.885