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Homework answers / question archive / Dividends from common stock are expected to pay 1 at the end of each year for the next 5 years and 2 for each year in the following 5 years

Dividends from common stock are expected to pay 1 at the end of each year for the next 5 years and 2 for each year in the following 5 years

Finance

Dividends from common stock are expected to pay 1 at the end of each year for the next 5 years and 2 for each year in the following 5 years. Dividends in subsequent years are expected to increase by 2% annually. If we assume that the annual effective interest rate is 6%, calculate the share price.

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D1=1

D2=1

D3=1

D4=1

D5=1

D6=2

D7=2

D8=2

D9=2

D10=2

Value after year 10=(D10*Growth rate)/(Interest rate-Growth rate)

=(2*1.02)/(0.06-0.02)

=51

Hence share price=Future dividend and value*Present value of discounting factor(rate%,time period)

=1/1.06+1/1.06^2+1/1.06^3+1/1.06^4+1/1.06^5+2/1.06^6+2/1.06^7+2/1.06^8+2/1.06^9+2/1.06^10+51/1.06^10

=38.99(Approx)

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