Question

The Seneca Maintenance Company currently (that is, as of year 0) pays a common stock dividend of $1.50 per share. Dividends are expected to grow at a rate of 12 percent per year for the next 4 years and then to continue growing thereafter at a rate of 5 percent per year. What is the current value of a share of Seneca common stock to an investor who requires a 16 percent rate of return? Use Table II to answer the question. Round your answer to the nearest cent.

Answer 1

To calculate the current value of a share of Seneca common stock, you can use the dividend discount model (DDM). The current value is approximately $16.50.

Step-by-step explanation:

To calculate the current value of a share of Seneca common stock, you can use the dividend discount model (DDM). The DDM formula is: Current stock value = Dividend / (Discount Rate - Dividend Growth Rate) In this case, the dividend payment in year 0 is $1.50. The dividend growth rate is 12% for the next 4 years, and then 5% thereafter. The discount rate is 16%. Using the formula, the current value of a share of Seneca common stock is approximately $16.50.