Question

Firm b pays a constant $9.50 dividend on its stock and will maintain this dividend for the next 11 years and will then cease paying dividends forever. if the required return on this stock is 11 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

Firm b pays a constant dividend (D0) = $9.50

Number of years (N) = 11 years

Rate of return on the stock ( R ) = 11%

The share price of the stock (P0) = Present value of dividend for 11 years at 11%

P0 = D0*PVIFA (k%,n)

P0 = $9.50*PVIFA(11%,11)

P0 = $9.50*6.20625

P0 = $58.96

Hence, the price of the stock is $58.96