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ella [17]
3 years ago
11

Arcs and Triangles paid an annual dividend of $1.47 a share last month. The company is planning on paying $1.55, $1.63, and $1.6

5 a share over the next three years, respectively. After that, the dividend will be constant at $1.70 per share per year. What is the market price of this stock if the market rate of return is 11 percent?
Business
1 answer:
Fittoniya [83]3 years ago
5 0

Answer:

Price of stock   =$ 15.31

Explanation:

<em>According to the dividend valuation model , the current price of a stock is the present value of the expected future dividends discounted at the required rate of return.</em>

<em>So we will discount the steams of dividend using the required rate of 11% as follows</em>:

Year                                             Present Value(PV)

1       $1.65 × 1.11^(-1)   =               1.486

2     $1.63× 1.11^(-2)     ==            1.322

3       $1.65× 1.11^(-3)               =  1.2064

<em>Year 4 and beyond</em>

This will be done in two steps

Step 1 :

PV of dividend in year 3  = 1.70/0.11 = 15.45

Step 2

PV of dividend in year 0 =15.45×  1.11^(-3)= 11.30

Price of stock =  1.486+  1.322  + 1.2064 + 11.30

                        =$ 15.31

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