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1) Warr Corporation just paid a dividend of $1
1) Warr Corporation just paid a dividend of $1.5 a share. The dividend is expected to grow 15.90% a year for the next 3 years and then at 5% a year thereafter. What is the expected dividend per share for each of the next 4 years?
2) Martell Mining Company’s ore reserves are being depleted, so its sales are falling. Also, because its pit is getting deeper each year, its costs are rising. As a result, the company’s earnings and dividends are declining at the constant rate of 5% per year. If current dividend is $5 and required rate of return 23.90%, what is the value of Martell Mining’s stock?
Expert Solution
1. The expected dividend of year 1 is computed as shown below:
= Dividend just paid x (1 + growth rate)
= $ 1.5 x 1.1590
= $ 1.7385
Dividend of year 2 is computed as follows:
= Dividend of year 1 x (1 + growth rate)
= $ 1.7385 x 1.1590
= $ 2.0149215
Dividend of year 3 is computed as follows:
= Dividend of year 2 x (1 + growth rate)
= $ 2.0149215 x 1.1590
= $ 2.335294019
Dividend of year 4 is computed as follows:
= Dividend of year 3 x (1 + growth rate)
= $ 2.335294019 x 1.05
= $ 2.452058719
2. The value of the stock is computed as follows:
= [ Current dividend x (1 - growth rate) ] / (required rate of return + growth rate)
= [ $ 5 x 0.95 ] / (0.2390 + 0.05)
= $ 4.75 / 0.289
= $ 16.44
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