VIP Corporation has just paid a dividend of $1.50.Dividends are expected to grow at 20% for the first three years and 10% for the following two years.What is the expected growth rate for the subsequent years if the stock is selling for $24.86 today and the required return is 17 percent?

Question

Quizplus · Accepted Answer

Compute PV(D_1-5)= [1.5*(1.20)]/(1.17)¹+[$1.5*(1.20)²/(1.17)²]+[$1.5*(1.20)³/(1.17)³]+[$1.5*(1.20)³/(1.17)⁴] +[$1.5*(1.20)³*(1.10)²/(1.17)⁵]= $7.68679 P₅ = (24.86−7.68679)*1.17⁵ = 37.651364,then 37.65136431 = [1.5*1.2³*1.1²*(1+g)]/(0.17−g) 6.40−37.65g = 3.1363+3.1363g 3.2637 = 40.7863g g = 8%

VIP Corporation Has Just Paid a Dividend of $1