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Mrac [35]
3 years ago
11

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
Business
1 answer:
zysi [14]3 years ago
7 0

Answer:

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

Explanation:

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

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

The dividends will be:

  • First year: <em>$8.50 + $6.50</em> = $15.00
  • Second year: $15.00 + <em>$6.50</em> =$21.50
  • Third year: $21.50 + <em>$6.50</em> = $28.00
  • Fourth year: $28.00 + <em>$6.50</em> = $34.50

You must discount each divident at the rate of <em>16%</em>: 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

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