Final answer:
The current share price of Burnett Corporation paying a $30 dividend for the next 11 years with a 7% return on stock is calculated using the dividend discount model. The present value of each dividend is discounted back to its value today. The summed present value of all dividends leads to the share price of $224.96.
Step-by-step explanation:
The question is asking to calculate the current share price of Burnett Corporation, given that it will pay a constant $30 dividend for the next 11 years and then stop paying dividends forever. The required return on stock is 7 percent. To calculate the current share price, we use the dividend discount model (DDM) for a finite period since the dividends are paid for a limited time.
Using the DDM approach, the present value of each dividend is found using the following formula for present value:
PV = D / (1 + r)^t
where D is the dividend, r is the required rate of return, and t is the time period.
We then sum up the present values of all dividends to arrive at the current share price:
Current Share Price = PV1 + PV2 + .... + PV11
Applying this formula:
= $30/(1+0.07)^1 + $30/(1+0.07)^2 + ... + $30/(1+0.07)^11
= $30/1.07 + $30/1.1449 + ... + $30/2.1057
= $28.04 + $26.19 + ... + $14.25
Summing up these present values gives us the current share price, which from the choices provided is $224.96 (Option B).