Question

Galloway, Inc. has an odd dividend policy. The company just paid a dividend of $6 per share and has announced that it will increase the dividend by $1 per share for each of the next 4 years, and then never pay another dividend. How much are you willing to pay per share today to buy this stock if you require a 10 percent return?

A. $27.08
B. $24.15
C. $26.57
D. $32.60
E. $33.33

Answer 1

maximum Current Price of Stock = $26.57

correct option is C. $26.57

Step-by-step explanation:

given data

dividend = $6 per share

increase the dividend = $1 per share

time = 4 year

return = 10 % = 0.1

to find out

How much are you willing to pay per share today to buy this stock

solution

we know that Current price we find dividend that is here

Year Dividend

1 (6+1) = $7

2 (7+1) = $8

3 (8+1) = $9

4 (9+1) = $10

so here current price by dividend and present value

current price =
`(D1)/((1+r)^1) +(D2)/((1+r)^2) +(D3)/((1+r)^3) +(D4)/((1+r)^4)`

current price =
`(7)/((1+0.1)^1) +(8)/((1+0.1)^2) +(9)/((1+0.1)^3) +(10)/((1+0.1)^4)`

current price = $26.57

correct option is C. $26.57