Question

Software Sales Supply is expected to pay its first annual dividend of $110 per share in Year 3. Starting in Year 6, the company plans to increase the dividend by 3.2 percent per year. What is the value of this stock today. Year O, at a required return of 13.1 percent? a. $8.22 b. $11.31 c. $51149 d. $12.66

Answer 1

Answer:

$8.22

Explanation:

Given:

Dividend for third year = $110  = 1.1%

Dividend for forth year = $110

Dividend for five year = $110

Increase dividend rate  from 6th year = 3.2%  = 0.032

Required Rate Return = 13.1%  = 0.131

Dividend for the 6th year = Dividend of 5th year(1 + Increase rate) =

1.1(1+0.032) = 1.1(1.032) = $1.1352

5th year dividend price = 1.1352/(0.131 - 0.032) = 1.1352 / 0.099 = $11.4666

$Present Value of the stock = 1.1/(1+0.131)^3 + 1.1/(1+0.131)^4 + 1.1/(1+0.131)^5 + 11.4666/(1+0.131)^5$

= $8.22