Bliley Plumbers pays no dividend at the present time. Thecompany plans to start paying an...

Bliley Plumbers pays no dividend at the present time. The company plans to start paying an annual dividend in the amount of $0.20 a share for three years commencing three years from today (ie, in years 3, 4 and 5). Beginning in year 6, the company plans on paying a constant $1 a share dividend each year forever. How much are you willing to pay to buy a share of this stock if your required return is 15 percent? (Show your work)

Expert Solution

- Company plans to pay annual dividend of $0.20 a share for three years commencing three years from today.

D3 = $0.20

D4 = $0.20

D5 = $0.20

Thereafter beginning in year 6 company will pay constant dividend of $1 a share forever.

So, D6 = $1

Required Rate of Return(Ke) = 15%

Calculating the Current Price of Share:-

P0 = $0.1315 + $0.1144 + $0.0994 + $3.3145

P0 = $3.66

SO, the amount you are willing to pay for the stock is $3.66

jeff jeffy answered 2 years ago

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