Question

Burkhardt Corp. pays a constant $14.40 dividend on its stock. The company will maintain this dividend for the next six years and will then cease paying dividends forever. If the required return on this stock is 12 percent, what is the current share price? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) Share price $

Answer 1

Answer:

$60.80

Explanation:

The value of the stock can be determine by using calculating the present value of the dividend. In this question the dividend of $14.40 will be paid for a specified period of six year. This is a type of annuity and we can calculate the stock value using following formula.

PV of annuity = P x [ ( 1- ( 1+ r )^-n ) / r ]

where

P is the annual payment means dividend payment of $14.40

r = required rate of return = 12%

n = numbers of years = 6 years

Placing value in the formula

Value of Stock = $14.40 x [ ( 1- ( 1+ 12% )^-6 ) / 12% ]

Value of Stock = $14.40 x [ ( 1- ( 1.12 )^-6 ) / 0.12 ]

Value of Stock = $60.80