Answered

Get expert advice and community support for all your questions on IDNLearn.com. Discover reliable and timely information on any topic from our network of knowledgeable professionals.

ETP Corp. paid an annual dividend last year of $5 per share. The company follows a policy to raise dividends each year by 2%. The company will be in business for 8 years and not have a liquidating dividend. The required rate of return for this investment is 10%. What is the price of this stock today?

a. 63.75
b. 28.91
c. 28.34
d. 62.50

Sagot :

Parrainidn

Answer: b. $28.91

Explanation:

The current price will be the present value of all future dividend payments till the company ceases operations in 8 years.

Price of stock = Sum of present value of dividends

The dividends here are increasing at a rate of 2% per year.

Year                             Dividend                                      Present Value            

1                                         $5.10                                 5.10/ (1 + 10%) = $4.64        

2                                        $5.20                                  5.20/ 1.1² =      $4.30

3                                        $5.30                                5.30 / 1.1³ =      $3.98

4                                        $5.41                                 5.41 /1.1⁴   =       $3.70

5                                       $5.52                                 5.52/1.1⁵ =        $3.43

6                                       $5.63                                   5.63/1.1⁶ =       $3.18

7                                       $5.74                                   5.74/1.1⁷ =        $2.94

8                                       $5.85                                   5.85/1.1⁸ =       $2.73

Total                                                                                                   $28.91

Your participation is crucial to us. Keep sharing your knowledge and experiences. Let's create a learning environment that is both enjoyable and beneficial. Thank you for visiting IDNLearn.com. We’re here to provide clear and concise answers, so visit us again soon.