eastern hotel corp. pays a constant $7.80 dividend on its stock. the company will maintain this dividend for the next 13 years a

Question

6 months ago

12

eastern hotel corp. pays a constant $7.80 dividend on its stock. the company will maintain this dividend for the next 13 years a

nd will then cease paying dividends forever. if the required return on this stock is 11.2%, what is the current share price?

Business

1 answer:

Lesechka [4] · Answer 1 · 2024-09-04T17:23:14+03:00

The stock is now trading at $52.16 per share.

The current value of an annuity of n regular payments of P at r% with yearly payments is provided by:

PV = P × (1 -( $(1 + r) ^{-n}$ ÷r))

Estes Park Corp. distributes a fixed rate of a dividend of P = $7.80 per share on its shares. The corporation will retain this dividend for the following n = 13 years before ceasing dividend payments permanently. If the necessary returns on this stock are not metis r = 11.2% = 0.112.

The actual share price is calculated as follows:

Current share price = $7.80 × (1 -( $(1 + 0.112) ^{-13}$ ÷0.112))

$7.80 × ((1 - 0.251) ÷ 0.112)

$52.16

Therefore, the current share price is $52.16