A company paid a dividend yesterday in the amount of $.28 a share. The company plans to double each annual dividend payment for the next three years. After that time, it plans to pay a constant $2.25 per share indefinitely. What is one share worth today if the market rate of return on similar securities is 11.5%?

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Asked Jan 31, 2019
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A company paid a dividend yesterday in the amount of $.28 a share. The company plans to double each annual dividend payment for the next three years. After that time, it plans to pay a constant $2.25 per share indefinitely. What is one share worth today if the market rate of return on similar securities is 11.5%?

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Expert Answer

Step 1

First step is to compute the Annual dividend in YEar-1,2 and 3.

The same is computed by doubling the dividend of previous year as under:

D0 = 0.28 (Given)

D1 = 0.28 *2  = 0.56

D2 = 0.56*2 = 1.12

D3 = 1.12*3 = 2.24

Step 2

Next step is to compute the price at the end of Year-3, whch is based on constant dividend from next year i.e. 2.25 per year and market rate of return i.e. 11.50% for perpetuity.

Thus, price at the end of Year-3 = 2.25 /  11.50% = $ 19.57

Step 3

Now, there are fours cashflows and the present values of each casjflows is computed and summed up ...

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