465,654 views
25 votes
25 votes
A company paid its annual dividends of $5.39 per share last week. The company expects to grow its dividends at the rate of 5.0 percent per year for four years, after which the dividends are expected to remain constant at the level of $7.13 per share per year in perpetuity. If investors require a rate of return of 11.5 percent on this company's stock, what should be the price of one share of this stock today

User Joe Holt
by
2.8k points

1 Answer

12 votes
12 votes

Answer: $58.7

Step-by-step explanation:

The price of one share of this stock today will be calculated thus:

Dividend of year 1= $5.39(1 + 0.05) = $5.66

Dividend of Year 2 = $5.39(1 + 0.05)² = $5.94

Dividend of Year 3 = $5.39(1 + 0.05)³ = $6.24

Dividend of Year 4 = $5.39(1 + 0.05)^4 = $6.55

We then calculate the value at year 4 which will be:

= $7.13 / 0.115 = $62

The price will then be:

Price = $5.66 / (1 + 0.115) + $5.94 / (1 + 0.115)² + $6.24/ (1 + 0.115)³ + $6.56 / (1 + 0.115)^4 + $62 / (1 + 0.115)^4

= $58.7

User MadsterMaddness
by
2.6k points