Walter Manufacturing produces ice cream machines. The future looks very bright f

Question

Walter Manufacturing produces ice cream machines. The future looks very bright for the company, but at the present time they do not pay any dividends to shareholders. Trevor Walter, CEO of the company stated in a recent press release that the company expects to begin paying dividends in 2022. Analysts following the company anticipate that dividend to be $0.30 per share annually with no growth thereafter. If you require a 7% return , what price would you expect for the stock today? (Today is year 2015)

$4.29

$2.57

$4.15

$2.86

$1.96

$4.29

$2.57

$4.15

$2.86

$1.96

Explanation / Answer

Po = D / Ke

Po = value of share

D = Dividend per share

Ke = Return on Equity

Po = $0.30 / 7% = $4.29

Option A is correct.

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