Question

ABC Company pays a constant $5.5 dividend on their stock. The company will maintain this dividend for the next 15 years and will then stop paying dividends forever. If the required return on this stock is 8.3%, what is the current share price?

Answer 1

Dividend paid each year = D = $5.5

Number of years = n = 15

rate of return = r = 8.3%

Present value of share =  D/(1+r) + D/(1+r)2 +....+ D/(1+r)n = D[1- (1+r)-n]/r

= 5.5[1- (1+0.083)-15]/0.083

= $46.23