Question

Morning Dew, Inc., has an odd dividend policy. The company has just paid a dividend of $6 per share and has announced that it will increase the dividend by $5 per share for each of the next five years, and then never pay another dividend. If you require a return of 12 percent on the company’s stock, how much will you pay for a share today?

Answer 1

Answer:

71.64

Explanation:

For computing the current price, first, we have to compute the dividend for next five years which are shown below:

In year 1 = ($6 + $5) = $11

In year 2 = ($11 + $5) = $16

In year 3 = ($16 + $5) = $21

In year 4 = ($21 + $5) = $26

In year 5 = ($26 + $5) = $31

Now the current price equal to

= Year 1 dividend ÷ (1+ rate) ^ 1 + Year 2 dividend ÷ (1+ rate) ^ 2 + Year 3 dividend ÷ (1+ rate) ^ 3 + Year 4 dividend ÷ (1+ rate) ^ 4 + Year 5 dividend ÷ (1+ rate) ^ 5

= 11 ÷ 1.12 ^ 1 + 16 ÷ 1.12 ^ 2 + 21 ÷ 1.12 ^ 3 + 26 ÷ 1.12 ^ 4 + 31 ÷ 1.12 ^ 5

= $9.82 + $12.76 + $14.95 + $16.52 + $17.59

= $71.64