Bui Corp. pays a constant $14.20 dividend on its stock. The company will maintai
ID: 2642844 • Letter: B
Question
Bui Corp. pays a constant $14.20 dividend on its stock. The company will maintain this dividend for the next ten years and will then cease paying dividends forever.
If the required return on this stock is 9 percent, what is the current share price? (Do not round intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).)
Bui Corp. pays a constant $14.20 dividend on its stock. The company will maintain this dividend for the next ten years and will then cease paying dividends forever.
Explanation / Answer
Share Price of the company depends upon various factors some of these are enumerated below:
1. Earning per share
2. Dividend per share
3. Net operating profits
4. Gross turnover or receipt
5. Amount of Debt financing done by the company
6. Credit Rating of the company
7. Future prospects and expansion plans
In the present question since the current share price is asked on the basis of the dividend declared by the company, we can find the price of share using the present value method of the dividends arising to the shareholders for the period of 10 years.
We have to discount the dividends in future years with the required rate of return which is 9%.
Formula for calculating the present value of the dividends over 10 years = D / (1+9%) ^1 + D / (1+9%) ^2 + D / (1+9%) ^3 + D / (1+9%) ^4 + D / (1+9%) ^5 + D / (1+9%) ^6 + D / (1+9%) ^7 + D / (1+9%) ^8 + D / (1+9%) ^9 + D / (1+9%) ^10
D = $ 14.20
Since the dividend is constant for all the 10 years, we have taken D = $ 14.20
Therefore, Current Price of the Share = Present Value of the all dividend payments
Present value is shown below:
Year
Dividend Amount (A)
Present Value of $ 1 at 9% (B)
Present Value of the Dividend (A*B)
1
$ 14.20
$ 0.91743119
$ 13.03
2
$ 14.20
$ 0.84167999
$ 11.95
3
$ 14.20
$ 0.77218348
$ 10.97
4
$ 14.20
$ 0.70842521
$ 10.06
5
$ 14.20
$ 0.64993139
$ 9.23
6
$ 14.20
$ 0.59626733
$ 8.47
7
$ 14.20
$ 0.54703424
$ 7.77
8
$ 14.20
$ 0.50186628
$ 7.13
9
$ 14.20
$ 0.46042778
$ 6.54
10
$ 14.20
$ 0.42241081
$ 6.00
Total Value
$ 91.13
Current Price of Share = $ 91.13
Year
Dividend Amount (A)
Present Value of $ 1 at 9% (B)
Present Value of the Dividend (A*B)
1
$ 14.20
$ 0.91743119
$ 13.03
2
$ 14.20
$ 0.84167999
$ 11.95
3
$ 14.20
$ 0.77218348
$ 10.97
4
$ 14.20
$ 0.70842521
$ 10.06
5
$ 14.20
$ 0.64993139
$ 9.23
6
$ 14.20
$ 0.59626733
$ 8.47
7
$ 14.20
$ 0.54703424
$ 7.77
8
$ 14.20
$ 0.50186628
$ 7.13
9
$ 14.20
$ 0.46042778
$ 6.54
10
$ 14.20
$ 0.42241081
$ 6.00
Total Value
$ 91.13
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