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NU YU announced today that it will begin paying annual dividends. The first dividend will be paid next year in the amount of $.33 a share. The following dividends will be $.38, $.53, and $.83 a share annually for the following three years, respectively. After that, dividends are projected to increase by 2.6 percent per year. How much are you willing to pay today to buy one share of this stock if your desired rate of return is 9 percent?

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abiolataiwo2015

Answer:

$11.05

Explanation:

Calculation for how much are you willing to pay today to buy one share of this stock

First step is to find the value after year 4

Using this formula

Value after year 4=(D4*Growth rate)/(Required rate-Growth rate)

Let plug in the formula

Value after year 4=(0.83×1.026)/(0.09-0.026)

Value after year 4=0.85158/0.064

Value after year 4=13.3058375

Second step is to calculate for the current value

Using this formula

Current value=Future dividend and value×Present value of discounting factor(rate percentage ,time period)

Let plug in the formula

Current value=0.33/1.09+0.38/1.09^2+0.53/1.09^3+0.83/1.09^4+13.3058375/1.09^4

Current value=0.30275+0.31983+0.40925+0.58799+9.42619

Current value=$11.05

Therefore How much you are willing to pay today to buy one share of this stock if your desired rate of return is 9 percent will be $11.05