Question

National Warehousing just announced it is increasing its annual dividend to $1.18 next year and establishing a policy whereby the dividend will increase by 3.25 percent annually thereafter. How much will one share of this stock be worth 8 years from now if the required rate of return is 9.5 percent?

Answer 1

Answer:

$24.38

Explanation:

The computation of the one share of worth is shown below:

= Eight-year dividend ÷ (Required rate of return - growth rate)

where,  

Next year dividend for eight-year s would be

= Annual dividend × (1 + growth rate)^number of years

= $1.18 × (1 + 3.25%)^8

= $1.18 × 1.291577535

= $1.524061492

The other items rate would remain the same

Now placing these values to the formula above

So, the price would equal to

= $1.524061492  ÷ (9.5% - 3.25%)

= $24.38