Spencer Co.'s common stock is expected to have a dividend of $5 per share for each...

Spencer Co.'s common stock is expected to have a dividend of $5 per share for each of the next 11 years, and it is estimated that the market value per share will be $108 at the end of 11 years. If an investor requires a return on investment of 10%, what is the maximum price the investor would be willing to pay for a share of Spencer Co. common stock today? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

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Expert Solution

Price of a share of Spencer Co. common stock today is $ 70.33

As per dividend discount model, price of the stock is the present value of future dividends.

Step-1:Present value of dividends of next 11 years

Present value	=	Annual dividend	*	Present value of annuity of 1
	=	$ 5.00	*	6.495061
	=	$ 32.48

Working;

Present value of annuity of 1	=	(1-(1+i)^-n)/i		Where,
	=	(1-(1+0.10)^-11)/0.10		i	=	10%
	=	6.495061		n	=	11

Step-2:Price of stock

Price of stock	=	Present value of next 11 years dividend	+	Present value of price at year end 11
	=	$ 32.48	+	$ 37.85
	=	$ 70.33

Working;

Present value of 1	=	(1+i)^-n		Where,
	=	(1+0.10)^-11		i	10%
	=	0.350494		n	11

Present value of price at year end 11	=	$ 108.00	*	0.350494
	=	$ 37.85

ekkarill92 answered 1 year ago

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