0

I came across the following question;

Mayfair corporation is expected to pay 40% dividends to its shareholders as its next dividend. However, the company announces that it is not expecting to pay a dividend for the following three years since it is hoping to utilize its earnings for the expansion of its business in India. The dividend after that is expected to be 25%, with the growth rate of dividend for the following two years forecasted at an annual rate of 10% and 20% respectively. Since the industry is expected to have reached its maturity stage thereafter, Mayfair corporation’s dividend growth rate is expected to decline by 2% into the future. If the required rate of return is 10%, what is the current value of its share?

I was wondering whether it is possible for the dividend rate to constantly decrease by 2% into the future. If so, at a time, the dividend would reach 0 right?

By the way, the answer I got for this is 2.23 times the share price. Most of you may be busy, however, if possible please let me know whether my answer is correct.

My workings

Thank you in advance!

Improve this question
1
  • 1
    Sounds like homework to me :->)
    – Bob Baerker
    Commented Mar 27, 2022 at 16:23

1 Answer 1

Reset to default
1

The dividend rate can decrease if the dividend per share stays the same but the value/price of each share goes up.

The dividend rate can go down of the price per share stays the same, but the dividend amount for each shares is lowered by a vote of the board of directors.

It can even go down if the amount of the dividend per share doesn't rise as fast as the price to purchase each share.

Dividends in the future are not guaranteed. The board decides what they want to do with the profits. They can return it to the people/institutions that own the shares, or they can save it until they need it to expand the company or buy another company.

I was wondering whether it is possible for the dividend rate to constantly decrease by 2% into the future. If so, at a time, the dividend would reach 0 right?

Yes. It can decrease naturally or by a vote of the board. Though to get to zero the board would have to vote to remove the dividend.

Improve this answer

You must log in to answer this question.

Not the answer you're looking for? Browse other questions tagged .