Question

NU YU announced today that it will begin paying annual dividends. The first dividend will be paid next year in the amount of $0.47 a share. The following dividends will be $0.52, $0.67, and $0.97 a share annually for the following three years, respectively. After that, dividends are projected to increase by 3.3 percent per year. How much are you willing to pay today to buy one share of this stock if your desired rate of return is 14 percent

Answer 1

Answer:

P0 = $7.383535 rounded off to $7.38

Explanation:

Using the dividend discount model, we calculate the price of the stock today. It values the stock based on the present value of the expected future dividends from the stock. To calculate the price of the stock today, we will use the following formula,

P0 = D1 / (1+r)  +  D2 / (1+r)^2  +  ...  +  Dn / (1+r)^n  +

[(Dn * (1+g)  /  (r - g))  /  (1+r)^n]

Where,

r is the required rate of return

g is the constant growth rate in dividends

n is the number of years

P0 = 0.47 / (1+0.14)  +  0.52 / (1+0.14)^2  + 0.67 / (1+0.14)^3  +  

0.97 / (1+0.14)^4  +  [(0.97 * (1+0.033)  /  (0.14 - 0.033))  /   (1+0.14)^4]

P0 = $7.383535 rounded off to $7.38