A company announced today that its next annual dividend will be $2.38 per share.

Question

A company announced today that its next annual dividend will be $2.38 per share. After that dividend is paid, the company expects to encounter some financial difficulties and is going to suspend dividends for 12 years. After that a constant dividend of $1.23 per share will be paid annually. The market rate of return on this stocks is 11 percent. What is the current value of this stock given this announcement? A company announced today that its next annual dividend will be $2.38 per share. After that dividend is paid, the company expects to encounter some financial difficulties and is going to suspend dividends for 12 years. After that a constant dividend of $1.23 per share will be paid annually. The market rate of return on this stocks is 11 percent. What is the current value of this stock given this announcement?

Explanation / Answer

A company announced today that its next annual dividend will be $2.38 per share. After that dividend is paid, the company expects to encounter some financial difficulties and is going to suspend dividends for 12 years. After that a constant dividend of $1.23 per share will be paid annually. The market rate of return on this stocks is 11 percent. What is the current value of this stock given this announcement?

P= 2.38/1.11+(1.23/.11)/1.11^12= $5.34

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