Question

bon chance inc has an odd dividend policy the company has just paid a dividend of $8.50 per share and has announced that it will increase the dividend by $6.50 per share for each of the next four years and the never pay another dividend if you require a return of 16 percent on the company's stock how much will you pay for a share today

Answer 1

Answer:

      $\large\boxed{\large\boxed{\ 65.90}}$

Explanation:

The value that you would be willing to pay for a share today should be the present value of all the dividends you will receive.

The present value of the dividends is equal to the sum of each dividend discounted at the required return rate.

The dividends will be:

• First year: $8.50 + $6.50 = $15.00

• Second year: $15.00 + $6.50 =$21.50

• Third year: $21.50 + $6.50 = $28.00

• Fourth year: $28.00 + $6.50 = $34.50

You must discount each divident at the rate of 16%: r = 0.16

Hence, the equation is:

              $\frac{\ 15.00}{(1+0.16)}+\frac{\ 21.50}{(1+0.16)^2}+\frac{\ 28.00}{(1+0.16)^3}+\frac{\ 34.50}{(1+0.16)^4}$

Compute and you obtain $65.90