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 $7 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 14 percent on the company

Maloney, Inc., has an odd dividend policy. The company has just paid a dividend of $7 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 14 percent on the company

Explanation / Answer

PV of D1 = 13 / 1.14 = 11.40

PV of D2 = 19 / 1.14^2 = 14.62

PV of D3 = 25 / 1.14^3 = 16.87

PV of D4 = 31 / 1.14^4 = 18.35

PV of D5 = 37 / 1.14^5 = 19.22

Value of stock = PVs of D1 to D5 = 11.40 + 14.62 + 16.87 + 18.35 + 19.22 = 80.47

Answer: Stock price = $ 80.47

Hope this helped ! Let me know in case of any queries.

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