Problem 6-16 H-Model (LO2, CFA6) The dividend for Should I, Inc., is currently $2.05 per share....
Problem 6-16 H-Model (LO2, CFA6)
The dividend for Should I, Inc., is currently $2.05 per share. It is expected to grow at 24 percent next year and then decline linearly to a perpetual rate of 6 percent beginning in four years. If you required a return of 13 percent on the stock, what is the most you would pay per share? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
Homework Answers
The value of a share is equal to the present value of all future dividends.
= 2.05(1.24)/(1.13) + 2.05(1.24)(1.18)/(1.13)2 + 2.05(1.24)(1.18)(1.12)/(1.13)3 + 2.05(1.24)(1.18)(1.12)(1.06)/(13%-6%)*(1.13)3
= 2.2496+2.3491 + 2.3283 + 35.2572
= $42.18
Hence, maximum price to be paid for share = $42.18
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Problem 6-16 H-Model (LO2, CFA6)
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