Homework SourseAstro Burger announced today that it will begin paying annua
Astro Burger announced today that it will begin paying annual dividends. The first dividend of $0.51 will be paid in one year. The second and third annual dividends will be $0.56 and $0.71, respectively. The forth annual dividend will be $1.01, and subsequent dividends will increase at 3.5 percent per year in perpetuity. If your required return is 9 percent annually, how much are you willing to pay today to buy this stock?
A. $19.67
B. $19.01
C. $3.92
D. $15.67
E. $19.52
| Astro Burger announced today that it will begin paying annual dividends. The first dividend of $0.51 will be paid in one year. The second and third annual dividends will be $0.56 and $0.71, respectively. The forth annual dividend will be $1.01, and subsequent dividends will increase at 3.5 percent per year in perpetuity. If your required return is 9 percent annually, how much are you willing to pay today to buy this stock? |
Solution
value of stock = 15.67
| Discount rate | 9.0000% | ||
| Cash flows | Year | Discounted CF= cash flows/(1+rate)^year | Cumulative cash flow |
| - | 0 | - | - |
| 0.510 | 1 | 0.47 | 0.47 |
| 0.560 | 2 | 0.47 | 0.94 |
| 0.710 | 3 | 0.55 | 1.49 |
| 1.010 | 4 | 0.72 | 2.20 |
| 19.006 | 4 | 13.46 | 15.67 |
