Final

Non Constant Dividend Growth – Practice problem

The Bellisimo Co. has just paid a dividend of $1.20. It has announced that it will grow its dividend by 12% each year for the next three years. It will then grow the dividend by 4% a year thereafter,

How much would you be willing to pay for a share in Bellisimo Co. today if your required rate of return is 10%?

D0 = $1.20

D1 = 1.20(1.12) =1.344

D2 = 1.344(1.12) = 1.505

D3 = 1.505(1.12) = 1.6859

D4 = 1.6859(1.04) = 1.7533 this is the horizon date

P3 = D4/(r-g) = 1.7533/0.06 = $29.22

P0 = 1.344/(1.10) + 1.505/(1.10)^2 + 1.6859/(1.10)^3 + 29.22/(1.10)^3

P0 = 1.222 + 1.244 + 1.636 + 21.956 = $26.06