Question

Briley, Inc., is expected to pay equal dividends at the end of each of the next two years. Thereafter, the dividend will grow at a constant annual rate of 4.6 percent, forever. The current stock price is $51.

  

What is next year’s dividend payment if the required rate of return is 13 percent? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

  

Dividend payment

Answer 1

Next Year's dividend payment will be $ 4.47.

As per the dividend discount model, current stock price is the present value of future dividends.
Step-1:Present value of equal dividend of next 2 years
Present value	=	D*(1+0.13)^-1	+	D*(1+0.13)^-2
	=	0.884956	D	+	0.783147	D
	=	1.668102	D
Step-2:Present value of dividends after year 2
Present value	=	D2*(1+g)/(Ke-g)*DF2			Where,
	=	D*(1+0.046)/(0.13-0.046)*0.783147			D2	=	Dividend of year 2	=	D
	=	9.752041	D		g	=	Growth rate	=	4.60%
					Ke	=	Required return	=	13%
					DF2	=	Discount factor	=	0.783147
Step-3:Calculation of next year's dividend
As per dividend discount model, price of stock is the sum of present value of dividends.
As per question,
Current stock price	=	Sum of present value of future dividends
$    51.00	=	1.668102	D	+	9.752041	D
$    51.00	=	11.42014	D
D	=	$       4.47
So, next years dividend will be $ 4.47