Diets For You announced today that it will begin paying annual dividends next year. The first dividend will be $1.25 a share. The following dividends will be $0.25, $0.25, $0.50, and $0.75 a share annually for the following 4 years, respectively. At the end of the fifth year, the stock could be sold for $18. How much are you willing to pay to buy one share of this stock today if your desired rate of return is 8.5 percent?
Please show work
Price of Stock today is the present value of inflows received during the five years of life: | |||||||
Therefore, the present value is computed as under: | |||||||
Year | Inflows | PVf at 8.50% | Present value | ||||
1 | 1.25 | 0.921659 | 1.152074 | ||||
2 | 0.25 | 0.849455 | 0.212364 | ||||
3 | 0.25 | 0.782908 | 0.195727 | ||||
4 | 0.5 | 0.721574 | 0.360787 | ||||
5 | 0.75 | 0.665045 | 0.498784 | ||||
5 | 18 | 0.665045 | 11.97082 | ||||
Present value | 14.39 | ||||||
Therefore, the price of stock today is $ 14.39 |
Diets For You announced today that it will begin paying annual dividends next year. The first...
Diets For You announced today that it will begin paying annual dividends next year. The first dividend will be $1.25 a share. The following dividends will be $0.25, $0.25, $0.50, and $0.75 a share annually for the following 4 years, respectively. At the end of the fifth year, the stock could be sold for $18. How much are you willing to pay to buy one share of this stock today if your desired rate of return is 8.5 percent? $14.39...
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