Question

Burnett Corp. pays a constant $7.85 dividend on its stock. The company will maintain this dividend for the next 12 years and will then cease paying dividends forever. If the required return on this stock is 9 percent, what is the current share price?

Answer 1

Current share price = Dividend/ (1 + required return)^period

Current share price = $7.85 / (1 + 9%)¹ + $7.85 / (1 + 9%)² + ...+ $7.85 / (1 + 9%)¹²

Using PVIFA = ((1 - (1 + Interest rate)^{- no of periods}) / interest rate) to

Current share price = $7.85 * (1 - (1 + 9%)^-12) / (9%)

Current share price = $56.21