Question

Distant Groves announced today that it will begin paying annual dividends next year. Dividends for the first three years will be $.15, $.20, and $.25 a share, respectively. After that, dividends are projected to increase by 4 percent per year. What is one share of this stock worth today at a required return of 8.5 percent?

Answer 1

one share of this stock worth today is $5.77

Step-by-step explanation:

Stock next annual dividend (in the 4th year) is $0.26 (= 0.25 x 1.04)

Value = Stock next annual dividend /(required return - dividend growth rate)

= 0.26/(8.5% -4%)