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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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