Answered

Welcome to Westonci.ca, where your questions are met with accurate answers from a community of experts and enthusiasts. Discover comprehensive answers to your questions from knowledgeable professionals on our user-friendly platform. Get precise and detailed answers to your questions from a knowledgeable community of experts on our Q&A platform.

NU YU announced today that it will begin paying annual dividends. The first dividend will be paid next year in the amount of $0.37 a share. The following dividends will be $0.42, $0.57, and $0.87 a share annually for the following three years, respectively. After that, dividends are projected to increase by 2.8 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 9 percent?

Sagot :

Shahzaibfaraz

Answer:

P0 = $11.968577  rounded off to $11.97

Explanation:

The dividend discount model (DDM) can be used to calculate the price of the stock today. DDM calculates the price of a stock based on the present value of the expected future dividends from the stock. The formula for price today under DDM is,

P0 = D1 / (1+r)  +  D2 / (1+r)^2  +  ...  +  Dn / (1+r)^n  +  [(Dn * (1+g) / (r - g)) / (1+r)^n]

Where,

  • D1, D2, ... , Dn is the dividend expected in Year 1,2 and so on
  • g is the constant growth rate in dividends
  • r is the discount rate or required rate of return

P0 = 0.37 / (1+0.09)  +  0.42 / (1+0.09)^2  +  0.57 / (1+0.09)^3  +  

0.87 / (1+0.09)^4  +  [(0.87 * (1+0.028) / (0.09 - 0.028)) / (1+0.09)^4]

P0 = $11.968577  rounded off to $11.97

Thank you for choosing our service. We're dedicated to providing the best answers for all your questions. Visit us again. We hope our answers were useful. Return anytime for more information and answers to any other questions you have. Westonci.ca is your trusted source for answers. Visit us again to find more information on diverse topics.