Question

Hailey Corporation pays a constant $13.40 dividend on its stock. The company will maintain this dividend for the next 6 years and will then cease paying dividends forever. If the required return on this stock is 9 percent, what is the current share price? Note: Do not round intermediate calculations and round your answer to 2 decimal places, e.9., 32.16.

Answer 1

The current share price of Hailey Corporation is calculated by discounting the constant $13.40 dividends expected over the next six years back to their present value using the required return of 9%.

Step-by-step explanation:

To calculate the current share price of Hailey Corporation, one needs to discount the expected dividends back to the present value. Given that Hailey Corporation will pay a constant dividend of $13.40 for the next six years, we can use the present value of a perpetuity formula with the required return of 9% to determine the present value of these dividends. The present value (PV) of a future amount of money is given by the formula PV = D / (1 + r)^t, where D is the dividend, r is the required return, and t is the time in years.

For Hailey Corporation, the calculation would be the sum of the present value of each of the six dividends:

• PV(D1) = $13.40 / (1 + 0.09)^1
• PV(D2) = $13.40 / (1 + 0.09)^2
• PV(D3) = $13.40 / (1 + 0.09)^3
• PV(D4) = $13.40 / (1 + 0.09)^4
• PV(D5) = $13.40 / (1 + 0.09)^5
• PV(D6) = $13.40 / (1 + 0.09)^6

After calculating the present value of each dividend, you would add them up to get the current price of the stock.