Question

Gruber Corp. pays a constant $8.50 dividend on its stock. The company will maintain this dividend for the next 11 years and will then cease paying dividends forever. If the required return on this stock is 9.5 percent, what is the current share price?

Answer 1

The current share price is computed as shown below:

= Dividend in year 1 / (1 + required rate of return )¹ + Dividend in year 2 / (1 + required rate of return )² + Dividend in year 3 / (1 + required rate of return )³ + Dividend in year 4 / (1 + required rate of return )⁴ + Dividend in year 5 / (1 + required rate of return )⁵ + Dividend in year 6 / (1 + required rate of return )⁶ + Dividend in year 7 / (1 + required rate of return )⁷ + Dividend in year 8 / (1 + required rate of return )⁸ + Dividend in year 9 / (1 + required rate of return )⁹ + Dividend in year 10 / (1 + required rate of return )¹⁰ + Dividend in year 11 / (1 + required rate of return )¹¹

= $ 8.50 / 1.095¹ +  $ 8.50 / 1.095² +  $ 8.50 / 1.095³ +  $ 8.50 / 1.095⁴ +  $ 8.50 / 1.095⁵ +  $ 8.50 / 1.095⁶ +  $ 8.50 / 1.095⁷ +  $ 8.50 / 1.095⁸ +  $ 8.50 / 1.095⁹ +  $ 8.50 / 1.095¹⁰ +  $ 8.50 / 1.095¹¹

= $ 56.50 Approximately

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