General Importers announced that it will pay a dividend of $3.65 per share one year from...

General Importers announced that it will pay a dividend of $3.65 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 4 years. Then, 6 years from today, the company will begin paying an annual dividend of $1.75 forever. The required return is 11.4 percent. What is the price of the stock today?

Expert Solution

The correct answer is $ 12.22

Notes:

Price Today = Present Value of Dividends+ Present Value of Price at Year 6

=$ 4.192125675547970 + $ 8.0319659310123

Price at Year 6 = Expected Dividend in Year 7 /Required return

= 1.75 / 11.4%

= $ 15.3508771929825

Present Value of Price at Year 6 = Price at Year 6 * Present Value of Discounting Factor ( Rate, Time)

= 15.3508771929825* 0.5232254437345130

= $ 8.0319659310123

Present Value of Dividends =

Year	Dividend	Discounting Factor(11.4%)	Present Value

1	3.65	0.8976660682226210	3.276481149012570
2	-	-	-
3	-	-	-
4	-	-	-
5	-	-	-
6	1.75	0.5232254437345130	0.9156445265353980



Present Value of Dividends			4.192125675547970

jeff jeffy answered 4 months ago

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