The Impulse Shopper recently paid an annual dividend of 113

The Impulse Shopper recently paid an annual dividend of $1.13 per share. The company just announced that it is suspending all dividend payments on its common stock for the next five years. After that, the company expects to pay $.50 a share at the end of each year. At a required return of 18 percent, what is this stock worth today?

$0

$1.13

$2.78

$1.03

$1.21

Solution

Value as on year 5=D5/Required return

=0.5/0.18

=$2.78(Approx)

Hence curernt value=Value as on year 5*Present value of discounting factor(rate%,time period)

=$2.78/1.18^5

=$2.78*0.437109216

which is equal to

=$1.21(Approx).