Question

Galloway, Inc. has an odd dividend policy. The company just paid a dividend of $6 per share and has announced that it will increase the dividend by $1 per share for each of the next 4 years, and then never pay another dividend. How much are you willing to pay per share today to buy this stock if you require a 10 percent return?

Answer 1

Answer:

the present value of the stock is 26.57

This will be the amount willing to pay per share today.

Explanation:

We have to calculate the present value of the future dividend

$\left[\begin{array}{ccc}Year&Cashflow&Present \: Value\\0&6&\\1&7&6.3636\\2&8&6.6116\\3&9&6.7618\\4&10&6.8301\\total&9.7&26.5671\\\end{array}\right]$

$\frac{Dividend}{(1 + rate)^{time} } = PV$

We will put each dividend and their year into the formula and solve for PV

First Year

$\frac{7}{(1 + 0.1)^{1} } = PV$

Second Year

$\frac{8}{(1 + 0.1)^{2} } = PV$

Third Year

$\frac{9}{(1 + 0.1)^{3} } = PV$

Fourth Year

$\frac{10}{(1 + 0.1)^{4} } = PV$

The value of the stock is the sum of the present value of their dividend

The sum for this firm is 26.5671 = 26.57