Astro Burger announced today that it will begin paying annual dividends. The fir

Question

Astro Burger announced today that it will begin paying annual dividends. The first dividend of $0.51 will be paid in one year. The second and third annual dividends will be $0.56 and $0.71, respectively. The forth annual dividend will be $1.01, and subsequent dividends will increase at 3.5 percent per year in perpetuity. If your required return is 9 percent annually, how much are you willing to pay today to buy this stock?

A. $19.67

B. $19.01

C. $3.92

D. $15.67

E. $19.52

Astro Burger announced today that it will begin paying annual dividends. The first dividend of $0.51 will be paid in one year. The second and third annual dividends will be $0.56 and $0.71, respectively. The forth annual dividend will be $1.01, and subsequent dividends will increase at 3.5 percent per year in perpetuity. If your required return is 9 percent annually, how much are you willing to pay today to buy this stock?

Explanation / Answer

value of stock = 15.67

Discount rate 9.0000% Cash flows Year Discounted CF= cash flows/(1+rate)^year Cumulative cash flow                              -   0                                            -                                           -                         0.510 1                                        0.47                                    0.47                       0.560 2                                        0.47                                    0.94                       0.710 3                                        0.55                                    1.49                       1.010 4                                        0.72                                    2.20                     19.006 4                                     13.46                                  15.67

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