Question

Burnett Corp. pays a constant $9.05 dividend on its stock. The company will maintain this dividend for the next 9 years and will then cease paying dividends forever. If the required return on this stock is 10 percent, what is the current share price?

Answer 1

52.12

Step-by-step explanation:

The present value of an annuity of $9.05 for 9 years at a 10% will be $52.12

So the current share price of Burnett Corp must be $52.12 to fullfil the requirement of a 10% return

Answer 2

The answer is $52.12.

Step-by-step explanation:

We apply the dividend discount model to come up with the price for share.

The price for share under the dividend discount model is the present value of all its future dividend discounted at the required rate of return.

As the share has 9 annual equal dividend payments of $9.05 each year and the required rate is 10%, we have the price of the share is calculated by applying the annuity formula as:

(9.05/0.1) * [1 - 1.1^(-9) ] = $52.12.

So, the current share price is $52.12.