Homework SourseMaloney Inc has an odd dividend policy The company has just
Maloney, Inc., has an odd dividend policy. The company has just paid a dividend of $2 per share and has announced that it will increase the dividend by $6 per share for each of the next five years, and then never pay another dividend. If you require a return of 12 percent on the company’s stock, how much will you pay for a share today? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
| Maloney, Inc., has an odd dividend policy. The company has just paid a dividend of $2 per share and has announced that it will increase the dividend by $6 per share for each of the next five years, and then never pay another dividend. If you require a return of 12 percent on the company’s stock, how much will you pay for a share today? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) |
Solution
To calculate the stock price, we need to calculate the present value of dividends.
Year 1 dividend = 2 +6 = 8
Year 2 dividend = 8 + 6 = 14
Year 3 dividend = 14 + 6 = 20
Year 4 dividend = 20 + 6 = 26
Year 5 dividend = 26 + 6 = 32
The price of the stock is:
| Year | Dividend | Return@12% | Present value |
| 1 | $ 8.00 | 0.893 | $ 7.14 |
| 2 | $ 14.00 | 0.797 | $ 11.16 |
| 3 | $ 20.00 | 0.712 | $ 14.23 |
| 4 | $ 26.00 | 0.636 | $ 16.52 |
| 5 | $ 32.00 | 0.567 | $ 18.16 |
| Current share price | $ 67.22 |
