Question

Bon Chance, Inc., has an odd dividend policy. The company has just paid a dividend of $3 per share and has announced that it will increase the dividend by $5 per share for each of the next four years, and then never pay another dividend. If you require a return of 9.7 percent on the company’s stock, how much will you pay for a share today

Answer 1

If you require a return of 9.7 percent on the company’s stock, you will pay $47.61 for a share today .

Step-by-step explanation:

Price today = Present Value of Dividends

Present Value of Dividends :

Year Dividend Discounting Factor(9.7%)

0 3.0000

1 8.00 0.9115770282588880

2 13.00 0.8309726784493050

3 18.00 0.7574956047851460

4 23.00 0.6905155923292130

year Present Value(Dividend* Discounting factor)

0

1 7.2926162260711000

2 10.8026448198410000

3 13.6349208861326000

4 15.8818586235719000

Present Value of Dividends 47.612040555616600

Therefore, If you require a return of 9.7 percent on the company’s stock, you will pay $47.61 for a share today .