Bowman Corp. pays a constant $13.60 dividend on its stock. The company will main

Question

Bowman Corp. pays a constant $13.60 dividend on its stock. The company will maintain this dividend for the next nine years and will then cease paying dividends forever.

  

If the required return on this stock is 12 percent, what is the current share price? (Do not include the dollar sign ($). Round your answer to 2 decimal places (e.g., 32.16).)

Bowman Corp. pays a constant $13.60 dividend on its stock. The company will maintain this dividend for the next nine years and will then cease paying dividends forever.

Explanation / Answer

We have details of future dividend payments. We can arrive at the share price of the company by using the dividend discount model (DDM). According to DDM, the price of a company is present value (PV) of future dividends discounted at expected return (r).

Here expected return is 12% (r); Dividends for years 1 to 9 is $ 13.60. Dividends from year 10 – Nil.

Year t 1 2 3 4 5 6 7 8 9 Dividend D 13.6 13.6 13.6 13.6 13.6 13.6 13.6 13.6 13.6 Discounting factor (1/((1+r)^t) 0.892857 0.797194 0.71178 0.635518 0.567427 0.506631 0.452349 0.403883 0.36061 PV of dividends (years 1 to 9) Summation of product of dividend and discounting factor for years 1 to 9 72.46 PV of dividends for year 10 onwards is nil as no future dividends are proposed to be paid Share price of the company is PV of future dividends which is $ 72.46

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