Asked Jan 31, 2019

A company is going to pay $.35, $.50, and $.80 a share over the next three years. After that, the company has stated that the annual dividend will be $1.25 per share indefinitely. What is this stock worth today at a discount rate of 13.45%?


Expert Answer

Step 1

First step is to compute the price prevailing at the end of Year-3 on the basis of annual dividend prevailed for inddefinite period and required rate of return. The same has been computed as under:

Price at the end of Year-3 = Annual dividend for indefinite priod/ Market rate of return =  1.25 /13.45% = $ 9.29

Step 2

Now, present values of 4 future cashflows are summed up to arrive at the stock ...


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