Maloney, Inc., has an odd dividend policy. The company has just paid a dividend of $2.36 per share and has announced that it will increase the dividend by $2.62 per share for each of the next five years, and then never pay another dividend. If you require a return of 3.71 percent on the company’s stock, how much will you pay for a share today
Let the dividend in year n be denoted by Dn
Given,
D0 = 2.36
D1 = 2.36 + 2.62 = 4.98
D2 = 4.98 + 2.62 = 7.60
D3 = 7.60 + 2.62 = 10.22
D4 = 10.22 + 2.62 = 12.84
D5 = 12.84 + 2.62 = 15.46
Required return = r = 3.71%
Hence, price of share today = D1/(1+r) + D2/(1+r)2 + D3/(1+r)3 + D4/(1+r)4 + D5/(1+r)5
= 4.98/(1+0.0371) + 7.60/(1+0.0371)2 + 10.22/(1+0.0371)3 + 12.84/(1+0.0371)4 + 15.46/(1+0.0371)5
= $45.01
Maloney, Inc., has an odd dividend policy. The company has just paid a dividend of $2.36...
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