Reference no: EM132915581

Problem 1: New competition in Karamazov Brothers' market is going to have an impact on the growth in the firm's dividends. A current dividend of $0.92 was paid yesterday by Karamazov Brothers, and this dividend is expected to increase by 20% in the first year. After that point, the growth in dividends is expected to "decay" to the firm's long-run constant growth of 5%. Such a "decay" process is one in which dividend growth declines by 5 percentage points per year up to the point where the expected constant rate of dividend growth is reached. So, year 2 dividend will be 15 percent higher than year 1, year 3 dividends will be 10 percent higher and after year 3, dividends will grow by 5 percent forever. Assume investors in Karamazov Brothers require a rate of return of 14%. Calculate the current price of Karamazov Brothers stock.