A company just paid out an annual dividend of $2. If the annual dividend is main
ID: 2713921 • Letter: A
Question
A company just paid out an annual dividend of $2. If the annual dividend is maintained at the same level for the next 5 years, and grows at 5% annually thereafter, what should be the price of a share today? Assume that the required rate of return for the stock is 15%. A company just paid out an annual dividend of $2. If the annual dividend is maintained at the same level for the next 5 years, and grows at 5% annually thereafter, what should be the price of a share today? Assume that the required rate of return for the stock is 15%.Explanation / Answer
Year Discount FaCTOR 15% Computation Dividend PV Of Dividend 1 0.8696 2 1.7391 2 0.7561 2 1.5123 3 0.6575 2 1.3150 4 0.5718 2 1.1435 5 0.4972 2 0.9944 Growing Perpetuity 0.4972 =2*1.05/(0.15-0.05) 21 10.4407 price of a share today 17.15
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