Question

General Importers announced today that its next annual dividend will be $2.60 per share. After that dividend is paid, the company expects to encounter some financial difficulties and is going to suspend dividends for 5 years. Following the suspension period, the company expects to pay a constant annual dividend of $1.30 per share. What is the current value of this stock if the required return is 18 percent?

Answer 1

Price = $4.88

Step-by-step explanation:

First, find the dividend per year;

D1 = 2.60

D2= 0

D3= 0

D4= 0

D5= 0

D6= 0

D7 (Onwards) = 1.30

Next, find the PV of each dividend given a rate of 18%

PV (D1) =2.60/(1.18) = 2.2034

PV (D1 to D6) = 0

PV (D7 onwards ) =
`(( 1.30)/(0.18) )/(1.18^(6) )` = 2.6753

Price = 2.2034 + 2.6753

Price = $4.88