Question

General Importers announced that it will pay a dividend of $4.30 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 6 years. Then, 8 years from today, the company will begin paying an annual dividend of $2.40 forever. The required return is 12.7 percent. What is the price of the stock today?

Answer 1

The price of the stock today is $11.59

Step-by-step explanation:

As Gordon Growth Model, price of stock = expected dividend paid/ (discounting rate - growth rate)

Growth rate of dividend from year 1 to year 8 (after 7 years)

= ($2.4/$4.3)^(1/7) - 1 = -8%

Price of stock = $2.4/(12.7% - (-8%) = $11.59