Question

Asonia Co. will pay a dividend of $4.90, $9.05, $11.90, and $13.65 per share for each of the next four years, respectively. The company will then close its doors. If investors require a return of 11.7 percent on the company's stock, what is the stock price

Answer 1

P0 = $28.94716756 rounded of to $28.95

Step-by-step explanation:

We can calculate the price of the stock today using the dividend discount model. The DDM values a stock based on the present value of the expected future dividends from the stock. The formula for price today under this model is,

P0 = D1 / (1+r) + D2 / (1+r)^2 + ... + Dn / (1+r)^n

Where,

• D1, D2, ... is dividend in year 1, year 2 and so on.

• r is the required rate of return

P0 = 4.9 / (1+0.117) + 9.05 / (1+0.117)^2 + 11.90 / (1+0.117)^3 +

13.65 / (1+0.117)^4

P0 = $28.94716756 rounded of to $28.95