Question

Asonia Co. will pay a dividend of $5.20, $9.30, $12.15, and $13.90 per share for each of the next four years, respectively. The company will then close its doors. If investors require a return of 9.6 percent on the company's stock, what is the stock price?

Answer 1

Answer:

$31.35 (Approx)

Explanation:

Require a return on company's stock = 9.6%

Dividend:

Year 1 = $5.20

Year 2 = $9.30

Year 3 = $12.15

Year 4 = $13.90

Therefore,

Stock price:

= Future dividends × Present value of discounting factor(rate%,time period)

$=\frac{5.20}{1.096}+\frac{9.3}{(1.096)^{2} }+\frac{12.15}{(1.096)^{3} }+\frac{13.90}{(1.096)^{4} }$

= $31.35 (Approx)