Homework SourseMaloney Inc has an odd dividend policy The company has just
Maloney, Inc., has an odd dividend policy. The company has just paid an annual dividend of $6 per share and has announced that it will increase the dividend by $5 per year for each of the next five years, and then never pay another dividend. If you require an annual return of 15 percent on the company’s stock, how much will you pay for a share today? Note: the $6 dividend has already been paid, so you should ignore it in the present value calculations.
| Maloney, Inc., has an odd dividend policy. The company has just paid an annual dividend of $6 per share and has announced that it will increase the dividend by $5 per year for each of the next five years, and then never pay another dividend. If you require an annual return of 15 percent on the company’s stock, how much will you pay for a share today? Note: the $6 dividend has already been paid, so you should ignore it in the present value calculations. |
Solution
- The price of a share today is the Present Value of the future year dividends.
- In this case the share is paying the dividend for the next 5 years, therefore, the share price the is the Present value of the next 5 years dividends discounted at the required annual rate of 15%
Share Price = $11/(1.15) + $16/(1.15)2 + $21/(1.15)3 + $26/(1.15)4 + $31/(1.15)5
= $9.57 + 12.10 + 13.81 + 14.87 + 15.41
= $65.76
“Hence, Share Price today = $65.76”
