An investor is considering making an investment in the common shares of GroCo Inc. GroCo’s current dividend is $3 per common share, and GroCo expects the annual dividend per common share for the next three years to be as follows:
Year 1: $4 Year 2: $6 Year 3: $7 After Year 3, GroCo expects the dividend to grow at an annual rate of 6%. Required:
a) If the investor requires a 15% rate of return on this investment, calculate the current price of each common share.
b) If the investor requires a 15% rate of return for the first year of the investment, calculate the projected return from dividends.