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General Importers announced that it will pay a dividend of $4.25 per share one year from today. After that, the company expects a slowdown in its business and will not pay a dividend for the next 5 years. Then, 7 years from today, the company will begin paying an annual dividend of $2.35 forever. The required return is 12.6 percent. What is the price of the stock today?

Respuesta :

beritop1089

Answer:

$12.93

Explanation:

First , find the dividend amount per year;

D1 = 4.25

D2,D3,D4,D5, D6 = 0

D3 = 2.2020(1.024) = 2.2548

D7 onwards = 2.35

Next, find the present value of the dividends at 12.6%;

PV (of D1) = 4.25/ 1.126 = 3.7744

PV (of D2 to D6) = 0

PV (of D7 onwards) today = (2.35/0.126) /(1.126^6)

PV (of D7 onwards) today = 18.6508 / 2.0381 = 9.1511

Add the PVs to find price of stock;

= 3.7744 + 0 + 9.1511

= $12.93

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