Question

Can't Hold Me Back, Inc. is preparing to pay its first dividends. It is going to pay $1.00, $2.50, and $5.00 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 7% rate of return

Answer 1

The stock worth to you per share if you demand a 7% rate of return is $21.78

Step-by-step explanation:

In order to calculate the stock worth per share if you demand a 7% rate of return we would have to make the following calculation:

stock worth per share=PV of the first three years' returns+PV of the constant dividend stream from the fourth year

PV of the first three years' returns = 1/1.07+2.5/1.07^2+5/1.07^3 =$7.20

PV of the constant dividend stream from the fourth year,= (1.25/0.07)/1.07^3 =$14.58

Therefore, stock worth per share=$7.20 +$14.58

stock worth per share=$21.78

The stock worth to you per share if you demand a 7% rate of return is $21.78