Question

A firm plans to begin paying a constant annual dividend of $1.50 a share beginning five years from now. If you require a rate of return of 7%, what is the most that you would be willing to pay for a share of this stock TODAY?

Answer 1

the current stock price is $16.35 per share

Step-by-step explanation:

The computation of the current stock price is shown below:

Price of share in Year 4 would be

= Annual Dividend ÷ Required rate of return

= $1.50 ÷ 0.07

= $21.43 per share

Now the current stock price is

Stock Price Today is

= Future Stock Price ÷ (1 + rate of interest)^number of years

= $21.43 ÷ (1 + 0.07)^4

= $21.43 ÷ 1.31080

= $16.35 per share

hence, the current stock price is $16.35 per share