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NU YU announced today that it will begin paying annual dividends. The first dividend will be paid next year in the amount of $0.39 a share. The following dividends will be $0.44, $0.59, and $0.89 a share annually for the following three years, respectively. After that, dividends are projected to increase by 2.9 percent per year. How much are you willing to pay today to buy one share of this stock if your desired rate of return is 10 percent?

Respuesta :

Karabo99

Answer:

You willing to pay $10.58 today to buy one share of this stock if your desired rate of return is 10 percent.

Explanation:

Value after year 4 = (D4*Growth rate)/(Required rate-Growth rate)

                              = (0.89*1.029)/(0.1-0.029)

                              = 12.8987324

current value = Future dividend and value*Present value of discounting factor(rate%,time period)      

= 0.39/1.1 + 0.44/1.1^2 + 0.59/1.1^3 + 0.89/1.1^4 + 12.8987324/1.1^4

= $10.58

Therefore, You willing to pay $10.58 today to buy one share of this stock if your desired rate of return is 10 percent.

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