Crosby Inc. has an 11% required rate of return. It will not pay any dividend until the end of year 20 at which time it will begin to pay an annual dividend of $4.00 per share which it will hold constant thereafter. What is an estimate of the price of Crosby's stock TODAY?

value of stock today = $5.01

Explanation:

given data

required rate = 11%

end of year = 20

annual dividend = $4.00

solution

price of the stock at the end of 19th year is

price of the stock = D : r ... 1

dividends are paid at the end of 20th year

we get price of the stock at the end of 19th year first

price of the stock = $4 : 0.11

price of the stock = $36.36

value of stock today = 36.36 * / frac{1}{ (1+r) ^t} ... 2

value of stock today = 36.36 * / frac{1}{ (1+0.11) ^{19}}

value of stock today = $5.01