Question

The Market Place recently announced that it will pay its first annual dividend two years from today. The first dividend will be $0.50 a share with that amount doubling each year for the following two years. After that, the dividend is expected to increase by 4 percent annually. What is the value of this stock today if the required return is 15 percent?

Answer 1

$12.99

Step-by-step explanation:

Calculation to determine the value of this stock today if the required return is 15 percent

First step is to calculate P4

P4= ($0.50 *2^2*1.04)/(0.15 - 0.04)

P4= $18.91

Now let calculate the value of this stock today (P0)

P0= [$0.50/1.15^2] + [$1/1.15^3] + [($2 + $18.91)/1.15^4]

P0= $12.99

Therefore the value of this stock today if the required return is 15 percent will be $12.99