Question

Bon Chance, Inc., has an odd dividend policy. The company has just paid a dividend of $9.25 per share and has announced that it will increase the dividend by $7.25 per share for each of the next four years, and then never pay another dividend.If you require a return of 14 percent on the company’s stock, how much will you pay for a share today?

Answer 1

Answer:

= $76.32

Explanation:

Calculate the Dividend amount per year;

D1 = 9.25+ 7.25 = 16.5

D2 = 15.5+ 7.25 = 23.75

D3 =23.75 + 7.25 = 31

D4 = 31 + 7.25 = 38.25

Next, use the dividend amounts per year and the required return of 14% to find the price per share;

PV (of D1) = 16.5 / (1.14) = 14.4737

PV (of D2)= 23.75/ (1.14²) = 18.2749

PV (of D3) = 31 / (1.14³) = 20.9241

PV (of D4) = $\frac{38.25}{(1.14)^{4} } = 22.6471$

Sum up the PVs;

= 14.4737 + 18.2749 + 20.9241 + 22.6471

Price = $76.32