In: Finance
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?
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 |