Question

Atlas Home Supply has paid a constant annual dividend of $2.40 a share for the past 15 years. Yesterday, the firm announced the dividend will increase next year by 10 percent and will stay at that level through Year 3, after which time the dividends will increase by 2 percent annually. The required return on this stock is 12 percent. What is the current value per share?A) $25.51B) $26.08C) $24.57D) $26.02E) $26.84

Answer 1

Answer:

option (A) $25.51

Explanation:

Given:

Annual dividend = $2.40

Dividend increase rate, g = 10% = 0.1

Dividend increase rate after 3 years, g' = 2% = 0.02

Required return on stock, r = 12% = 0.12

Now,

Price after 3 years = $\frac{\textup{Annual dividend }\times(1+g)\times(1+g')}{\textup{(r-g')}}$

= $\frac{\textup{2.40}\times(1+0.1)\times(1+0.02)}{\textup{(0.12-0.02)}}$

= $26.928

Therefore,

The current value per share = $\frac{\ 2.40\times1.10}{(1+0.12)^1} + \frac{\ 2.40\times1.1}{(1+0.12)^2} + (\ 2.40\times1.1} + \frac{\ 26.928}{(1+0.12)^3} )$

or

The current value per share = $25.51

Hence,

the correct answer is option (A) $25.51