Constant Growth Rate

| January 22, 2015

The Bravo Company just paid an annual dividend of $4.00 per share. Due to a need to conserve cash, the dividend in one year will be cut to zero. Dividends per share are forecasted to be $1.50 in two years, $2.50 in three years, and $3.50 in four years. After four years, dividends are expected to grow at a constant rate forever. Investors in Bravo Company require a return of 12%. The current market price of Bravo’s stock is $30.66 per share.

Determine the constant growth rate in dividends after four years that would justify the current market price.

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