Question

announced today that it will begin paying annual dividends. The first dividend will be paid next year in the amount of $0.27 a share. The following dividends will be $0.32, $0.47, and $0.77 a share annually for the following three years, respectively. After that, dividends are projected to increase by 2.3 percent per year. How much are you willing to pay today to buy one share of this stock if your desired rate of return is 12 percent

Answer 1

$6.48

Step-by-step explanation:

div 1 = $0.27

div 2 = $0.32

div 3 = $0.47

div 4 = $0.77

div 5 = $0.77 + 2.3%

required rate of return = 12%

first we must determine the stock price in 4 years = ($0.77 + 1.023) / (12% - 2.3%) = $8.12

now we must determine the stock price including all dividends up to year 4:

stock price = $0.27/1.12 + $0.32/1.12² + $0.47/1.12³ + $0.77/1.12⁴ + $8.12/1.12⁴ = $0.24 + $0.26 + $0.33 + $0.49 + $5.16 = $6.48