Question

Mother and Daughter Enterprises is a relatively new firm that appears to be on the road to great success. The company paid its first annual dividend yesterday in the amount of $.28 a share. The company plans to double each annual dividend payment for the next three years. After that time, it is planning on paying a constant $1.50 per share indefinitely. What is one share of this stock worth today if the market rate of return on similar securities is 11.5%

Answer 1

$12.43

Step-by-step explanation:

Price of the stock can be determined by calculating the present value of the stock

Present value is the sum of discounted cash flows

Present value can be calculated using a financial calculator

Cash flow in year 1 = 0.28 x 2

Cash flow in year 2 = 0.56 x 2

Cash flow in year 3 = 1.12 + 1.50 0.115

I = 11.5

PV = 12.43

To find the PV using a financial calculator:

1. Input the cash flow values by pressing the CF button. After inputting the value, press enter and the arrow facing a downward direction.

2. after inputting all the cash flows, press the NPV button, input the value for I, press enter and the arrow facing a downward direction.

3. Press compute