Question

Burnett Corp. pays a constant $8.90 dividend on its stock. The company will maintain this dividend for the next 12 years and will then cease paying dividends forever. If the required return on this stock is 11 percent, what is the current share price?

Answer 1

Price today = $57.78196973 rounded off to $57.78

Step-by-step explanation:

The dividends paid by the stock can be said to be in the form of an annuity as the dividend payment is constant, it occurs after equal interval of time and it is expected for a finite or limited period of time. These satisfy the conditions of being an annuity. We assume that the dividend are paid at the end of the year and this is in form of an ordinary annuity.

To calculate the present value of the stock today, we will use the formula for present value of ordinary annuity. The formula for present value of annuity is attached.

Price today = 8.9 * [ (1 - (1+0.11)^-12) / 0.11 ]

Price today = $57.78196973 rounded off to $57.78