Maloney, Inc., has an odd dividend policy. The company has just paid a dividend

Question

Maloney, Inc., has an odd dividend policy. The company has just paid a dividend of $5 per share and has announced that it will increase the dividend by $4 per share for each of the next five years, and then never pay another dividend. If you require a return of 10 percent on the company’s stock, how much will you pay for a share today?

Maloney, Inc., has an odd dividend policy. The company has just paid a dividend of $5 per share and has announced that it will increase the dividend by $4 per share for each of the next five years, and then never pay another dividend. If you require a return of 10 percent on the company’s stock, how much will you pay for a share today?

Explanation / Answer

Current price=Future dividends*Present value of discounting factor(rate%,time period)

=9/1.1+13/1.1^2+17/1.1^3+21/1.1^4+25/1.1^5

which is equal to

=$61.56(Approx).

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