Question

Burkhardt corp. pays a constant $13.50 dividend on its stock. the company will maintain this dividend for the next eight years and will then cease paying dividends forever. if the required return on this stock is 11 percent, what is the current share price

Answer 1

Answer: Burkhardt Corp.'s current share price is $69.47.

The current share price of a stock can be viewed as the present value of its expected dividends.

In this case, the stock price will be the sum of the discounted value of the dividends over each of the next  eight years.

Mathematically we can express this as:

$\mathbf{Current Price = \frac{D}{(1+r)^{1}}+\frac{D}{(1+r)^{2}}+\frac{D}{(1+r)^{3}}......+\frac{D}{(1+r)^{n}}}$

Substituting the values we get,

$Current Price = \frac{13.5}{1.11^1}+\frac{13.5}{1.11^2}+\frac{13.5}{1.11^3}+\frac{13.5}{1.11^4}+\frac{13.5}{1.11^5}+\frac{13.5}{1.11^6}+\frac{13.5}{1.11^7}+\frac{13.5}{1.11^8}$

Solving the above equation we get,

$\mathbf{Current Price = 69.47}$