Question

NU YU announced today that it will begin paying annual dividends. The first dividend will be paid next year in the amount of $.27 a share. The following dividends will be $.32, $.47, and $.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

The maximum hat should be paid for the stock today is $6.48

Step-by-step explanation:

The price of the stock today can be calculated using the dividend discount model. It bases the price or value of a stock on the present value of the expected future dividends from the stock.

The price of the stock today is,

P0 = 0.27/(1+0.12) + 0.32/(1+0.12)^2 + 0.47/(1+0.12)^3 + 0.77/(1+0.12)^4

[ (0.77 * (1+0.023)) / (0.12 - 0.023) ] / (1+0.12)^4

P0 = $6.48092 rounded off to $6.48