Question

Suppose that a share of common stock is expected to pay a $3 dividend one year from now, and thereafter each annual dividend payment will increase by 4% over the prior payment. The effective annual interest rate is 12%. Find the modified duration of this share of stock.

Answer 1

13

Step-by-step explanation:

Modified duration of stock = (1 + Growth rate) / (Effective rate - Growth rate)

Modified duration of stock = (1 + 4%) / (12% - 4%)

Modified duration of stock = (1 + 0.04) / 0.08

Modified duration of stock = 1.04 / 0.08

Modified duration of stock = 13

So, the modified duration of this share of the stock is 13.