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love history [14]
3 years ago
7

Software Sales Supply is expected to pay its first annual dividend of $1.10 per share in Year 3. Starting in Year 6, the company

plans to increase the dividend by 3.2 percent per year. What is the value of this stock today, Year 0, at a required return of 13.1 percent?
Business
1 answer:
Andru [333]3 years ago
8 0

Explanation:

Let the dividend paid in Year n be Dn

Given, D3 = $1.10

D4 = $1.10

D5 = $1.10

Growth in dividend from Year 6 = g = 3.2%

D6 = D5(1+g) = 1.10(1+0.032) = $1.135

Required Return = r = 13.1%

According to Gordon's Growth model,

P5 = D6/(r - g) = 1.135/(0.131 - 0.032) = $11.464

Present Value of the stock = P0 = D3/(1+r)3 + D4/(1+r)4 + D5/(1+r)5 + P5/(1+r)5

= 1.10/(1+0.131)3 + 1.10/(1+0.131)4 + 1.10/(1+0.131)5 + 11.464/(1+0.131)5

= <u>$8.22</u>

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