Cascade Mining Company expects its earnings and dividends to increase by 7% per year over the next six years and then to remain relatively constant thereafter.
Cascade Mining Company expects its earnings and dividends to increase by 7 percent per
year over the next six years and then to remain relatively constant thereaft er. Th e fi rm
currently (that is, as of year 0) pays a dividend of $5 per share. Determine the value of a
share of Cascade stock to an investor with a 12 percent required rate of return.
To calculate the expected dividends in the next six years and beyond for Cascade Mining Company, you need to apply the 7% annual growth rate to the current earnings or dividends.
Here's how you can calculate it step by step:
1. Start by determining the current earnings or dividends of Cascade Mining Company. Let's say it is $1,000.
2. Use the 7% annual growth rate to calculate the expected earnings or dividends for each subsequent year. Use the following formula:
Expected Earnings/Dividends = Current Earnings/Dividends x (1 + Growth Rate)
For example, for the first year:
Expected Earnings/Dividends = $1,000 x (1 + 0.07) = $1,070
3. Repeat the calculation for each subsequent year, adjusting the current earnings/dividends each time. For example, for the second year:
Expected Earnings/Dividends = $1,070 x (1 + 0.07) = $1,144.90
Continue this calculation for the next four years as well.
4. After the sixth year, you are told that the earnings and dividends will remain relatively constant. This means that you can assume no further growth in earnings or dividends, and they will remain at the level reached in the sixth year.
So, use the value of earnings/dividends you calculated in the sixth year as the base value for the subsequent years.
For example, if in the sixth year the expected earnings/dividends are $1,400, then it will remain at this level for all subsequent years.
By following these steps, you can calculate the expected earnings and dividends for Cascade Mining Company over the next six years and beyond.