Question

General Importers announced that it will pay a dividend of $3.85 per share one year from today. After that, the company expects a slowdown in its business and will not pay a dividend for the next 5 years. Then, 7 years from today, the company will begin paying an annual dividend of $1.95 forever. The required return is 11.8 percent. What is the price of the stock today

Answer 1

The right response is "$11.91".

Step-by-step explanation:

Dividend

= $3.85 per share

Required return

= 11.8%

Annual dividend

= 1.95

Now,

The price of share at the beginning of year 7 will be:

=
`(Annual \ dividend)/(Required \ return)`

On substituting the values, we get

=
`(1.95)/(11.8 \ percent)`

=
`16.53` ($)

So,

The price of the stock today will be:

=
`Present \ value \ of \ all \ future \ dividend`

=
`3.85* 0.894+16.53* 0.512`

=
`3.4419+8.46336`

=
`11.91` ($)