New Products pays no dividend at the present time. Starting in Year 3, the firm will...

New Products pays no dividend at the present time. Starting in Year 3, the firm will pay a $.25 dividend per share for two years. After that, the company plans on paying a constant $.75 a share annual dividend indefinitely. How much should you pay per share to purchase this stock today at a required return of 13.8 percent?

Expert Solution

Ke4 = D5/P4 + g

Since g=0, the formula will be Ke4 = D5/P4;

0.138 = 0.75/P4

Hence P4 = 5.43

P0 = P4/1.138^4 = 5.43/1.138^4 = $3.24

Dividend of 0.25 in years 3 and 4 will be

0.25/1.138^3 + 0.25/1.238^4 = 0.32

Hence Price of Share today will be 3.24 + 0.32 =$3.56

jeff jeffy answered 2 years ago

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