Question

Bui Corp. pays a constant $12 dividend on its stock. The company will maintain this dividend for the next nine years and will then cease paying dividends forever. Required: If the required return on this stock is 10 percent, what is the current share price?

Answer 1

Answer:

share price 69.108

Explanation:

We have to calculate the present value of the dividends like it was an annuity using the required return.

$C \times \frac{1-(1+r)^{-time} }{rate} = PV$

$12\time \frac{1-(1+0.10)^{-9} }{0.10} = PV$

PV 69.108

the gordon dividend growth model doesn't apply becasue the dividend will cease to exist, there is no infinite future dividend to calculate the present value using that method.