Question

Bui Corp. pays a constant $12 dividend on its stock. The company will maintain this dividend for the next nine years and will then cease paying dividends forever. Required: If the required return on this stock is 10 percent, what is the current share price?

Answer 1

share price 69.108

Step-by-step explanation:

We have to calculate the present value of the dividends like it was an annuity using the required return.

`C * (1-(1+r)^(-time) )/(rate) = PV\\`

`12\time (1-(1+0.10)^(-9) )/(0.10) = PV\\`

PV 69.108

the gordon dividend growth model doesn't apply becasue the dividend will cease to exist, there is no infinite future dividend to calculate the present value using that method.