Rite Bite Enterprises historically has not been a dividend paying company but in its latest board meeting the company decided to start paying a fixed dividend of $1.5 for the next year. After the first dividend, they expect that the dividend will grow at 5% over the following three years and it will maintain a constant 6% annual growth rate thereafter. (Please draw a timeline to show your work.)
(a) What are the expected dividends in years 5 and 10?
(b) If the discount rate for the stock is 10%, at what price will the stock sell today?
(c) What is the expected stock price three years from now?
(d) If your annual required rate of return is 12% for the next 4 years and 8% thereafter how much will you pay for a share of Rite Bite's stocks today?
The solution discusses expected dividends of Rite Bite Enterprises. The price the stock will sell for today is determined.