Question

6. The Cart Wheel plans to pay an annual dividend of $1.20 per share next year, $1.00 per share a year for the following two years, and then cease paying dividends altogether. How much is one share of this stock worth to you today if you require a 17% rate of return

Answer 1

Price per share = $2.38

Step-by-step explanation:

Using the dividend discount model, we can calculate the fair price per share of the stock.

The formula for price is,

P = D1 / 1+r + D2 / (1+r)^2 + ... and so on

Where,

• D1 is dividend next year from today
• r is the required rate of return

Thus, Price for such a stock is,

P = 1.2 / (1+0.17) + 1 / (1+0.17)^2 + 1 / (1+0.17)^3 => $2.3805