Question

New Products pays no dividend at the present time. Starting in Year 3, the firm will pay a $.25 dividend per share for two years. After that, the company plans on paying a constant $.75 a share annual dividend indefinitely. How much should you pay per share to purchase this stock today at a required return of 13.8 percent

Answer 1

Answer:

price of Share today = $3.56

Explanation:

given data

pay a dividend per share = $.25

annual dividend indefinitely = $.75

required return k4 = 13.8 percent

solution

we know that required return is express as

required return  = (annual dividend ÷ present value) + growth

here g is 0

so

0.138 = 0.75 ÷ P4

so P4 = 5.43

and at starting

Po = $\frac{P4}{(1+k4)^4}$  

Po = $\frac{5.43}{1.138^4}$

Po = $3.24

so here dividend of 0.25 in 3 and 4 year will be here as

= \frac{0.25}{0.138^3} + \frac{0.25}{0.138^4}

= $0.32  

so here price of Share today is

price of Share today =  $3.24 + $0.32

price of Share today = $3.56