Question

Burnett Corp. pays a constant $8.75 dividend on its stock. The company will maintain this dividend for the next 10 years and will then cease paying dividends forever. If the required return on this stock is 12 percent, what is the current share price? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Answer 1

$49.44

Step-by-step explanation:

Data provided in the question:

Dividend paid = $8.75

Time, n = 10 years

Required return rate = 12% = 0.12

Now,

Present value annuity for 10 years = [ 1 - (1 + r)⁻ⁿ ] ÷ r

= [ 1 - (1 + 0.12 )⁻¹⁰ ] ÷ 0.12

= 5.65

Therefore,

Current share price = Current Dividend × Present value annuity for 10 years

or

Current share price = $8.75 × 5.65

= $8.75 × 5.65

= $49.437 ≈ $49.44