Last year, a company has paid a $10 annual dividend. Until recently, the market has expected it to grow by 3% a year forever, trading the stock for

$85. Now, the company has announced that dividends will be withheld for the next three years, in order to finance new investments.

 

What growth rate does the market expect after the fourth year, if the company starts paying $10 dividends in the fourth year, provided the dividends announcement had no impact Whatsoever on the stock price?

Answer rating: 100% (QA)

We can use the dividend discount model to calculate the markets expected growth rate after the fourt... View the full answer