Star Light & Power increases its dividend 3 percent per year every year. This ut

Question

Star Light & Power increases its dividend 3 percent per year every year. This utility is valued using a discount rate of 10 percent, and the stock currently sells for $53 per share. If you buy a share of stock today and hold on to it for at least three years, what do you expect the value of your dividend check to be three years from today? (Do not round intermediate calculations. Round your answer to 2 decimal places. Omit the "$" sign in your response.)

Star Light & Power increases its dividend 3 percent per year every year. This utility is valued using a discount rate of 10 percent, and the stock currently sells for $53 per share. If you buy a share of stock today and hold on to it for at least three years, what do you expect the value of your dividend check to be three years from today? (Do not round intermediate calculations. Round your answer to 2 decimal places. Omit the "$" sign in your response.)

Explanation / Answer

Price of stock today = Dividend check one year from today / (Discount rate - Dividend growth)

=> $53 = Dividend check one year from today / (10% - 3%)

=> Dividend check one year from today = $3.71 per share

Therefore, dividend check three years from today = $3.71 * (1+3%)2

= $3.94

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