Burnett Corp. pays a constant $9.80 dividend on its stock. The company will maintain this dividend for the next 14 years and wil

Question

n200080 [17]

3 years ago

14

Burnett Corp. pays a constant $9.80 dividend on its stock. The company will maintain this dividend for the next 14 years and wil

l then cease paying dividends forever. If the required return on this stock is 11 percent, what is the current share price?

Business

1 answer:

lys-0071 [83] · Answer 1 · 2022-01-25T08:55:20+03:00

Answer:

The current price of the stock is $68.42

Explanation:

The dividends on a stock that pays a constant dividend and will cease paying dividend after a defined period can be treated as an annuity. The dividends are constant and are paid after equal interval of time and for a defined period of time. To calculate the price of the share today, we will use the formula for the present value of ordinary annuity. The formula is,

Present value = 9.8 * [ 1 - (1+0.11)^-14 / 0.11 ]

Present value or current price of the stock = $68.42