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Galina-37 [17]
2 years ago
11

General Importers announced today that its next annual dividend will be $2.60 per share. After that dividend is paid, the compan

y expects to encounter some financial difficulties and is going to suspend dividends for 5 years. Following the suspension period, the company expects to pay a constant annual dividend of $1.30 per share. What is the current value of this stock if the required return is 18 percent?
Business
1 answer:
maks197457 [2]2 years ago
4 0

Answer:

Price = $4.88

Explanation:

First, find the dividend per year;

D1 = 2.60

D2= 0

D3= 0

D4= 0

D5= 0

D6= 0

D7 (Onwards) = 1.30

Next, find the PV of each dividend given a rate of 18%

PV (D1) =2.60/(1.18) = 2.2034

PV (D1 to D6) = 0

PV (D7 onwards ) = \frac{\frac{ 1.30}{0.18} }{1.18^{6} } = 2.6753

Price = 2.2034 + 2.6753

Price = $4.88

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