Question

pays a constant $8 dividend on its stock. The company will maintain this dividend for the next 10 years and will then cease paying dividends forever. If the required rate of return on this stock is 8.5 percent, what is the current share price

Answer 1

Answer:

The current share price is $52.49.

Explanation:

Price of a share which involve a Dividend payment for a specific period can be calculated by calculating present values of future expected dividends which is a annuity payment.

Present value of an annuity = D x ( 1 - ( 1 + r )^-n ) / r

Present value of an annuity = $8 x ( 1 - ( 1 + 0.085 )^-10 ) / 0.085

Present value of an annuity = $8 x ( 1 - ( 1.085 )^-10 ) / 0.085

Present value of an annuity = $52.49

Current price of the share = $52.49