Question

Burnett Corp. pays a constant $7.10 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 return on this stock is 11 percent, what is the current share price? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Answer 1

Answer:

Current share price = $41.81

Explanation:

According to the dividend valuation model the value of a stock is the present value of future dividends discounted at the required rate of return. The  model is stated below

Current share price = A × 1- (1+r)^(-n)/r

So to find the price of the stock, we discount the annuity dividend  of $7.10 for 10 years at 11%

A - dividend, r - required rate of return, n - number of years,

A= 7.10 , r- 11% , n = 10 years

Current share price

= 7.10 × (1-(1.11)^(-10))/0.11

= 7.10 × 5.8892

= $41.81354728

Current share price = $41.81