Ask Question
23 July, 07:24

Software Sales Supply is expected to pay its first annual dividend of $1.10 per share in Year 3. Starting in Year 6, the company plans to increase the dividend by 3.2 percent per year. What is the value of this stock today, Year 0, at a required return of 13.1 percent?

+3
Answers (1)
  1. 23 July, 10:58
    0
    Let the dividend paid in Year n be Dn

    Given, D3 = $1.10

    D4 = $1.10

    D5 = $1.10

    Growth in dividend from Year 6 = g = 3.2%

    D6 = D5 (1+g) = 1.10 (1+0.032) = $1.135

    Required Return = r = 13.1%

    According to Gordon's Growth model,

    P5 = D6 / (r - g) = 1.135 / (0.131 - 0.032) = $11.464

    Present Value of the stock = P0 = D3 / (1+r) 3 + D4 / (1+r) 4 + D5 / (1+r) 5 + P5 / (1+r) 5

    = 1.10 / (1+0.131) 3 + 1.10 / (1+0.131) 4 + 1.10 / (1+0.131) 5 + 11.464 / (1+0.131) 5

    = $8.22
Know the Answer?
Not Sure About the Answer?
Find an answer to your question ✅ “Software Sales Supply is expected to pay its first annual dividend of $1.10 per share in Year 3. Starting in Year 6, the company plans to ...” 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