Question

5. Renew It, Inc, is preparing to pay its first dividend. It is going to pay $0.45, $0.60, and $1 a share over the next three years, respectively. After that, the company has stated that the annual dividend will be $1.25 per share indefinitely. What is this stock worth to you per share if you demand a 10.8 percent rate of return on stocks of this type

Answer 1

$10.14

Step-by-step explanation:

We need to first find the perpetual stock's worth after 3 years.

The formula would be:

`P=(D)/(r)`

Where

P is price of stock

D is the indefinite dividend worth

r is the rate of return you want

So, it will be:

`P_3=(1.25)/(0.108)=11.57`

Now, we want the stock's worth (in total) for the scenario:

The formula would be:

`P=\sum ((D)/((1+r)^t) +(D+P_3)/((1+r)^t)`

So, we take individual 3 years, remembering to add the P_3 to the last year (Year 3).

So, we have:

`P=(0.45)/(1+0.108^1)+(0.6)/((1+0.108)^2)+(1+11.57)/((1+0.108)^3)=10.14`

The stock is worth $10.14