Ask Question
23 April, 19:16

A common stock pays dividends at the end of each year into perpetuity. Assume that the dividend increases by 2% each year. Using an annual effective interest rate of 5%, calculate the Macaulay duration of the stock in years

+4
Answers (1)
  1. 23 April, 19:24
    0
    35 years

    Explanation:

    Data given in the question

    Increase in dividend = 2%

    Annual effective interest rate = 5%

    So by considering the above information, the duration of the stock in years is

    = 1 : (Annual effective interest rate - increase in dividend)

    = 1 : (5% - 2%)

    = 1 : 3%

    = 33.33

    Now the duration of the stock in years is

    = (1 + interest rate) ^ 33.33

    = (1 + 0.05) ^33.33

    = 1.05^33.33

    = 34.999 years i. e 35 years
Know the Answer?
Not Sure About the Answer?
Find an answer to your question ✅ “A common stock pays dividends at the end of each year into perpetuity. Assume that the dividend increases by 2% each year. Using an annual ...” in 📘 Business if you're in doubt about the correctness of the answers or there's no answer, then try to use the smart search and find answers to the similar questions.
Search for Other Answers