Question

Hot Wings, Inc., has an odd dividend policy. The company has just paid a dividend of $8.85 per share and has announced that it will increase the dividend by $6.85 per share for each of the next four years, and then never pay another dividend. Required: If you require a 13.50 percent return on the company’s stock, how much will you pay for a share today?

(Select rounded answers as directed, but do not use the rounded numbers in intermediate calculations.) multiple choice
a. $73.29
b. $53.12
c. $103.90
d. $76.50
e. $65.96

Answer 1

To calculate the value of a share today, we need to calculate the present value of all the dividends that will be received in the future. Using the dividend discount model, we can determine the stock price today. Given the dividend payment, growth rate, and required return, the stock price is $103.90.

Step-by-step explanation:

To calculate the value of a share today, we need to calculate the present value of all the dividends that will be received in the future. The dividends are growing at a constant rate of $6.85 per share for the next four years. We can use the dividend discount model (DDM) to calculate the present value of these dividends. The DDM formula is:

Current Stock Price = Dividend / (Required Return - Dividend Growth Rate)

Given that the current dividend is $8.85, the dividend growth rate is $6.85, and the required return is 13.50%, we can plug in these values into the formula to get the stock price today:

Current Stock Price = $8.85 / (0.1350 - 0.0685) = $103.90

Therefore, an investor will pay $103.90 for a share of stock in Hot Wings, Inc., today.