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ETP Corp. paid an annual dividend last year of $5 per share. The company follows a policy to raise dividends each year by 2%. The company will be in business for 8 years and not have a liquidating dividend. The required rate of return for this investment is 10%. What is the price of this stock today?

a. 63.75
b. 28.91
c. 28.34
d. 62.50

Sagot :

Parrain

Answer: b. $28.91

Explanation:

The current price will be the present value of all future dividend payments till the company ceases operations in 8 years.

Price of stock = Sum of present value of dividends

The dividends here are increasing at a rate of 2% per year.

Year                             Dividend                                      Present Value            

1                                         $5.10                                 5.10/ (1 + 10%) = $4.64        

2                                        $5.20                                  5.20/ 1.1² =      $4.30

3                                        $5.30                                5.30 / 1.1³ =      $3.98

4                                        $5.41                                 5.41 /1.1⁴   =       $3.70

5                                       $5.52                                 5.52/1.1⁵ =        $3.43

6                                       $5.63                                   5.63/1.1⁶ =       $3.18

7                                       $5.74                                   5.74/1.1⁷ =        $2.94

8                                       $5.85                                   5.85/1.1⁸ =       $2.73

Total                                                                                                   $28.91

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