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.
Thank you in advance!