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Morning Dew, Inc., has an odd dividend policy. The company has just paid a dividend of...

Morning Dew, Inc., has an odd dividend policy. The company has just paid a dividend of $5 per share and has announced that it will increase the dividend by $6 per share for each of the next five years, and then never pay another dividend. If you require a return of 12 percent on the company’s stock, how much will you pay for a share today?

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Answer #1

Answer:

Given:

D0 = $5

D1 = $5 +$6 = $11

D2 = $11 + $6 = $17

D3 = $17 + $6 = $23

D4 = $23 + $6 = $29

D5 = $29 + $6 = $35

D6 and onward = $0

Require rate of return = R = 12%

Current share price = D1 / (1 + R) + D2 / (1 + R)2 + D3 /(1 + R)3 + D4 / (1 + R)4 + D5 / (1 + R)5

= 11 / (1 + 12%) + 17 / (1 + 12%)2 + 23 /(1 + 12%)3 + 29 / (1 + 12%)4 + 35 / (1 + 12%)5

= $78.03463 or $78.03

Amount you pay for a share = $78.03

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