Dexter Metals, paid its first annual dividend yesterday in the amount of $0.18 a share. The company plans to double each annual dividend payment for the next 3 years. After that time, it plans to pay $1.25 a share for 2 years than then pay a constant dividend of $1.60 per share indefinitely. What is one share of this stock worth today if the market rate of return on similar securities is 10.24 percent

The price per share of this stock is $13.20

Explanation:

Using the dividend discount model, we can calculate the price per share today of this stock. The DDM values a stock based on the present value of the expected future dividends of the stock discounted using the required rate of return on the stock. The price o=per share today for this stock is,

P0 = 0.18 * (1+1) / (1+0.1024) + 0.18 * (1+1) ^2 / (1+0.1024) ^2 +

0.18 * (1+1) ^3 / (1+0.1024) ^3 + 1.25 / (1+0.1024) ^4 + 1.25 / (1+0.1024) ^5 +

(1.60 / 0.1024) / (1+0.1024) ^5

P0 = $13.20