Question

5. Renew It, Inc, is preparing to pay its first dividend. It is going to pay $0.45, $0.60, and $1 a share over the next three years, respectively. After that, the company has stated that the annual dividend will be $1.25 per share indefinitely. What is this stock worth to you per share if you demand a 10.8 percent rate of return on stocks of this type

Answer 1

Answer:

$10.14

Explanation:

We need to first find the perpetual stock's worth after 3 years.

The formula would be:

$P=\frac{D}{r}$

Where

P is price of stock

D is the indefinite dividend worth

r is the rate of return you want

So, it will be:

$P_3=\frac{1.25}{0.108}=11.57$

Now, we want the stock's worth (in total) for the scenario:

The formula would be:

$P=\sum (\frac{D}{(1+r)^t} +\frac{D+P_3}{(1+r)^t}$

So, we take individual 3 years, remembering to add the P_3 to the last year (Year 3).

So, we have:

$P=\frac{0.45}{1+0.108^1}+\frac{0.6}{(1+0.108)^2}+\frac{1+11.57}{(1+0.108)^3}=10.14$

The stock is worth $10.14