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NU YU announced today that it will begin paying annual dividends. The first dividend will be paid next year in the amount of $.35 a share. The following dividends will be $.40, $.55, and $.85 a share annually for the following three years, respectively. After that, dividends are projected to increase by 2.7 percent per year. How much are you willing to pay today to buy one share of this stock if your desired rate of return is 8 percent?]

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beritop1089

Answer:

$13.84

Explanation:

Find the present value (PV) of each year's dividend;

PV( of D1) = 0.35 / (1.08) = 0.3241

PV( of D2) = 0.40 / (1.08²) = 0.3429

PV( of D3) = 0.55 / (1.08³) = 0.4366

PV( of D4) = 0.85 /(1.08^4)  = 0.6248

Find PV of terminal cashflow;

D5 = D4(1+g) = 0.85(1.027)  = 0.8730

PV( of D5 onwards)= [tex]\frac{\frac{0.8730}{0.08- 0.027} }{1.08^{4} }\\ \\ =\frac{16.4717}{1.3605}[/tex]

PV( of D5 onwards) = 12.1071

Sum up the PVs to find the price per share;

= 0.3241 + 0.3429 + 0.4366 + 0.6248 + 12.1071

= 13.836

Therefore, you should pay $13.84

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