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?

Dividend

First year = $2.544

Second year = $3.053

Third year = $3.48

Fourth year = $3.97

Fifth year = $4.53

Sixth year =$5.16

Explanation:

As dividend is the share of earning distributed to the stockholders. The stockholders expects a good return from the company against their interst in the company. Company make a dividend policy and calculates the growth of dividend accordingly.  

Dividend Paid = $2.12

Company expected 20% growth in next two years so,

Dividend First year = $2.12 x 120% = $2.544

Dividend Second year = $2.544 x 120% = $3.053

Dividend of following three years will grow at 14%

Dividend Third year = $3.053 x 114% = $3.48

Dividend Fourth year = $3.48 x 114% = $3.97

Dividend Fifth year = $3.97 x 114% = $4.53

After this it will grow 8% indefinitely

Dividend Sixth year = $4.53 x 114% = $5.16

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