Question

Dexter Metals, paid its first annual dividend yesterday in the amount of $0.18 a share. The company plans to double each annual dividend payment for the next 3 years. After that time, it plans to pay $1.25 a share for 2 years than then pay a constant dividend of $1.60 per share indefinitely. What is one share of this stock worth today if the market rate of return on similar securities is 10.24 percent

Answer 1

Answer:

The price per share of this stock is $13.20

Explanation:

Using the dividend discount model, we can calculate the price per share today of this stock. The DDM values a stock based on the present value of the expected future dividends of the stock discounted using the required rate of return on the stock. The price o=per share today for this stock is,

P0 = 0.18 * (1+1) / (1+0.1024)  +  0.18 * (1+1)^2 / (1+0.1024)^2  +  

0.18 * (1+1)^3 / (1+0.1024)^3  +  1.25 / (1+0.1024)^4  +  1.25 / (1+0.1024)^5  +  

(1.60 / 0.1024) / (1+0.1024)^5

P0 = $13.20