is preparing to pay its first dividends. It is going to pay $1.00, $2.50, and $5.00 a share over the next three years, respectively. After that, the company has stated that the annual dividend will be $1.25 per share indefinitely. What is this stock worth to you per share if you demand a 7% rate of return?

Question

Business

Dylan Herrera

5 June, 23:17

is preparing to pay its first dividends. It is going to pay $1.00, $2.50, and $5.00 a share over the next three years, respectively. After that, the company has stated that the annual dividend will be $1.25 per share indefinitely. What is this stock worth to you per share if you demand a 7% rate of return?

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Emmett Vasquez · Answer 1

The answer is: share price should be $21.78.

Explanation:

The share price equals to the present value of the annual dividend stream earned from the share paid at the end of each year; discounting at the required rate of return 7%.

We have dividend stream given as follow: Y1: $1; Y2: $2.5; Y3: $5; Y4 forward: fixed at $1.25.

So share price = 1/1.07 + 2.5/1.07^2 + 5/1.07^3 + [ (1.25/0.07) / 1.07^3 ] = 0.94 + 2.18 + 4.08 + 14.58 = $21.78.

So, the answer is share price should be $21.78.