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 12 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.)

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 12 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.)

Explanation / Answer

To calculate the stock price, we need to calculate the present value of dividends.

Year 1 dividend = 2 +6 = 8

Year 2 dividend = 8 + 6 = 14

Year 3 dividend = 14 + 6 = 20

Year 4 dividend = 20 + 6 = 26

Year 5 dividend = 26 + 6 = 32

The price of the stock is:

Year Dividend Return@12% Present value 1 $      8.00 0.893 $            7.14 2 $   14.00 0.797 $          11.16 3 $   20.00 0.712 $          14.23 4 $   26.00 0.636 $          16.52 5 $   32.00 0.567 $          18.16 Current share price $          67.22

Related Questions

Navigate

• Browse (All)
• Browse M
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.