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 $2 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 10 percent on the company’s stock, how much will you pay for a share today? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

**I was going to use the most general equation for Stock Valuation: P0 = Dt + 1 / (R-g), but the two different share prices is throwing me off. Plus it can't be a Constant Growth question because they stop paying the dividend after a certain point, right? Can anyone walk me through this, please? Everything must be rounded to 2 decimal places.

Explanation / Answer

Share Price Today               71.50 Statement showing Cash flows Particulars Time PVF@10% Amount PV Cash Flows (Dividend) = 2+ 6                 1.00            0.9091                                     8.00                                     7.27 Cash Flows (Dividend) = 8 + 6                 2.00            0.8264                                   14.00                                   11.57 Cash Flows (Dividend) = 14+ 6                 3.00            0.7513                                   20.00                                   15.03 Cash Flows (Dividend) = 20 +6                 4.00            0.6830                                   26.00                                   17.76 Cash Flows (Dividend) = 26 + 6                 5.00            0.6209                                   32.00                                   19.87 PV of Dividends or share Price                                   71.50

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