Question

Maurer, Inc., has an odd dividend policy. The company has just paid a dividend of $2.75 per share and has announced that it will increase the dividend by $4.50 per share for each of the next five years and then never pay another dividend. If you require a return of 11 percent on the company’s stock, how much will you pay for a share today?

Answer 1

If the company does not pay a dividend after the next five years then its value or future value after 5 years will be 0. The required return on the company is 11% and its previous dividend was 2.75 and it will increase the dividend by 4.5 every year. So we can discount these future dividends and find the present value of them in order to find the price of the stock.

Dividend 1= 2.75+4.5= 7.25

Dividend 2= 7.25+4.5 = 11.75

Dividend 3= 11.75+4.5= 16.25

Dividend 4 = 16.25+4.5= 20.75

Dividend 5 = 20.75+4.5= 25.25

7.25/1.11 +

11.75/1.11^2 +

16.25/1.11^3 +

20.75/1.11^4 +

25.25/1.11^5 +

=56.60

We will pay $56.60 for the stock today as that is the present value of all its future cash flows.

Step-by-step explanation: