Question

MMM Inc. has an annual cash dividend policy that raises the dividend each year by 14.00​%. Last​ year's dividend was​ $2.50per share. Investors want a 17​% return on this stock. What is the price today of this stock if the company will be in business for five years and not have a liquidating dividend​ (there is no selling price​ - stock simply cease to exist with no value​ then)?

The price of this stock today is ​$____

Answer 1

Last year's Dividend = $2.50

Grwoth rate of Dividend(g) = 14% per year

Dividend in year 1 from now = D0(1+g) = $2.50*(1+0.14) = 2.85

Company will only pay Dividend for 5 years and after taht the company will cease to exist and no value then.

So, the current Price of Stock consist of Present Value of grwoth dividend of 5 years.

Calcualting Present Value of growth dividend of 5 years using PV of growth annuty formula:-

Where, C= First year dividend or dividend 1 year drom now = $2.85

r = Required return = 17%

g = Growth rate of dividend = 14%

n= no of periods = 5

Present Value = $11.57

So, the price today of this stock is $11.57

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