Question

lightworks inc. has a cost of equity of 10%. the firm will pay an annual dividend of $2.9 in one year and its dividends had been expected to grow by 6% per year thereafter. you just heard on the news that lightworks has changed its growth forecasts and now expects its dividend to grow by 4% per year forever after the first year.

Answer 1

Answer:

Cost of equity of 10% on annual pay of $2.9 gives us the Share price of dividends that is $29.

When company is expected to grow by 6% per year, the annual pay of the firm rounds up by dividing share price to dividend yield that is 6%.

6/29×100

= $1.74

The firm has to pay an annual dividend of $1.74

After the forecasts on growth, expectation of dividends growth is 4% per year.

4/29×100

= $1.16

The firm has to pay the annual dividend on the cost of equity per year forever is $1.16

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