Question

Apocalyptica Corp. pays a constant $29 dividend on its stock. The company will maintain this dividend for the next 10 years and will then cease paying dividends forever. Required: If the required return on this stock is 14 percent, what is the current share price?

Answer 1

Based on the dividend discount model, current value of stock is present value of all dividends expected in future. So, we need to compute PV of dividends, which are a form of an annuity

PV =

[1-(4+5)-) [1-(1+r)-n LT P= Periodic Payment r=rate per period n = number of periods

$PV = 29 * [\frac{1 - (1 + 0.14)^{-10}}{0.14}]$

PV = 29 * 5.2161

PV = $151.27